US economy up 3.2% in Q1

WASHINGTON: The United States economy expanded at a 3.2 per cent annual rate in the first quarter as consumers stepped up spending, the strongest sign yet that a sustainable recovery is taking hold.

While growth slowed from the fourth quarter's rapid 5.6 per cent pace and was a tad weaker than economists had expected, the details of the report from the Commerce Department yesterday were fairly upbeat.

Consumer spending, which normally accounts for about 70 per cent of US economic activity, added nearly 2.6 percentage points to gross domestic product (GDP) last quarter, the biggest contribution since the fourth quarter of 2006.

'Once you take a quick look under the hood, you see some very positive signs there,' said Mr Ward McCarthy, chief financial economist at Jefferies & Company in New York. 'This is just the latest piece of evidence to suggest that the recovery is sustainable.'

Analysts had expected GDP, which measures total goods and services output within US borders, to grow at a 3.4 per cent rate in the first quarter.

The economy has now grown for three straight quarters, although it still has a lot of lost ground to make up after its deepest and longest recession since the 1930s.

The report showed consumer spending rose at a 3.6 per cent rate in the first quarter, more than double the 1.6 per cent pace in the fourth quarter last year and the biggest gain since the first quarter of 2007.

'Retail sales are up, people are spending money,' said Mr Michael Woolfolk, a senior currency strategist at BNY Mellon in New York. 'We are seeing the beginning of the process of a broad-based recovery.'

The US has emerged from the recession more swiftly than Europe or Japan.

Analysts said the welcome but moderate pace of US growth meant the Federal Reserve could bide its time before raising benchmark interest rates from their current levels near zero, particularly with unemployment hovering near 10 per cent.

The US central bank on Wednesday noted that activity had strengthened in recent weeks and that the labour market was starting to improve. Still, it said it expected a modest recovery and renewed its vow to keep rates low for an extended period.

Business inventories increased US$31.1 billion (S$42.7 billion) in the first quarter, adding 1.57 percentage points to GDP, as businesses restocked to meet firming demand. It was the first increase in inventories since the first quarter of 2008.

Businesses also continued to spend on software and equipment, though a bit less vigorously than in the prior quarter, boding well for the economic recovery.

New home construction was a drag on growth in the first quarter after two quarters of gains. Residential investment contracted at a 10.9 per cent rate.

Source: Straits Times, 1 May 2010