US economy surges 5.8% in opening three months

The US economy roared back at a 5.8 per cent annual rate in the first three months of the year, confounding most analysts and increasing expectations that interest rates will soon start their long climb back to pre-slowdown levels.

The surge in growth, reported yesterday by the US Commerce Department, was largely due to the easing by businesses of their clear-out of inventories.

Last year's slump will now go down as one of the mildest on record, despite September 11th and the collapse of the technology sector.

The news gives a fillip to President Bush in the run-up to this year's mid-term Congress elections in November, though the growth rate could slip if consumer spending does not continue at the same rate coming out of the slowdown as during it.

Analysts on average had predicted the first-quarter gross domestic product, regarded as the broadest measure of the economy's health, would grow by 5 per cent.

The economy's first-quarter rebound, the fastest since the last quarter of 1999, shows an astonishing capacity for recovery in the US, especially after GDP shrank at a 1.3 per cent rate in the third quarter of 2001. Analysts then predicted a recession lasting until well into this year.

Even the Federal Reserve did not anticipate such a bullish rate of growth in the first quarter, though Fed chairman Mr Alan Greenspan told Congress earlier this month that the outlook was brighter. At that time, he signalled that the central bank was not in any hurry to raise short-term interest rates, now at their lowest since the early 1960s.

The new growth figure is certain to spark a new debate on when to apply the brakes. Stocks on Wall Street fell in anticipation of an early rate increase, with the Dow Jones sliding below 10,000 for the first time in months in midday trading.

The dollar also fell, with investors unconvinced that better-than-expected growth would keep pace going forward while a consumer report - the Michigan sentiment survey - for April only compounded that view falling to 93.0 in April from 95.7 in March. The expectations index, which measure attitudes for the 12 months ahead, fell to 89.2 from 92.7 last month.

The euro edged up to a new three and a half month peak against the dollar, touching $0.9002 after the GDP figures were announced, before slipping back to $0.8976

One factor which could persuade the Fed to hold off boosting the inter-bank lending rate until mid-summer is that inflation continues to remain under control.

The Commerce Department reported that the price index for personal consumption rose by only 0.6 per cent, down from the 0.8 per cent of the fourth quarter.

The jump in GDP was mainly attributed to the continued strong spending by consumers and an easing by businesses in their slashing of inventories.

Business inventories fell just $36.2 billion in the quarter after falling a record $119.3 billion in the last quarter of 2001, adding 3.1 percentage points to GDP.

The fall in business investment is bottoming out, falling 5.7 per cent in the quarter compared with 13.8 per cent in the previous quarter.

Mr Greenspan compared the recovery to a two-stage rocket, with the restocking of inventories supplying the first stage followed by a second stage of business and consumer spending.

The GDP would have been 1.2 per cent stronger were it not for the huge US trade deficit.

Mr Brian Wesbury, chief economist for the Joint Economic Committee of Congress, said: "The Federal Reserve cannot, in good conscience, hold the federal funds rate at 1.75 per cent with the economy growing at a much faster nominal rate. We continue to expect the Fed to hike rates in June, or at the latest August."

(Additional reporting: Reuters)