--Higher-than-expected US GDP won't deter Fed ease in May: analysts
By Mariko de Couto, Nikki Baldwin, Shanthy Nambiar
New York, April 27 (BridgeNews) - The surprisingly strong first quarter U.S. growth indicates that the domestic economy was not in danger of slipping into a recession and presages a recovery in the second half of this year, economists said. But for now, the Federal Reserve will likely stick to its accommodative policy and ease interest rates again in May to ensure that economic growth gets back on track later this year, they said.
* * * First quarter GDP rose 2.0%, surpassing the consensus forecast of a 1.1% rise and the 1.0% growth in the fourth quarter of last year. The report showed broad-based strength, with remarkable vigor seen in consumer spending.
While many economists had worried that consumer spending would have weakened due to the reversal of the wealth effect from stock prices, the latest GDP report shows that consumers haven't really tightened their purse strings.
Consumer spending soared 3.1% in the first quarter, acting as the largest contributor to GDP growth in the first three months of the year. In addition, final sales soared 4.6% in the first quarter, which had waned to its slowest rate in over five years the previous quarter. Even capital spending--an area the Fed cited as a concern in its post-easing statement on April 18--was firm at 1.1% compared with a 0.1% rise in the fourth quarter.
Good news came on the inventory front as well since the report showed that companies have aggressively worked down their excess stockpile in the first quarter. Inventories subtracted 2.5 percentage points from overall GDP, the largest rate in almost three years.
One of the slightly worrisome aspects of the report was the rise in the GDP price deflator, which rose sharply by 3.2%, the strongest rate in a year.
And a relatively weak area in the report, if anything, was the 2.1% drop in equipment investment.
Henry Willmore, senior economist at Barclays Capital, said that the Fed will likely continue to ease, though the data suggest that further cuts may not be necessary.
The Fed has cut rates aggressively in the first quarter, he said, adding with sarcasm: "Somehow, the Fed is uncomfortable with 4.6% final sales growth."
Willmore actually warns of stagflation in the U.S. economy and has maintained for a while now that core inflation is on the rise. "Consumer prices are up over 4% annualized in the first quarter. There are signs of higher inflation in a lot of measures," he said.
Willmore expects GDP growth to be even stronger in the second quarter, coming in at 3%.
As for the report itself, Willmore cited the increase in consumer spending of durable goods, which supports the improvement in auto sales in the first quarter compared with the last three quarters of 2000. More