U.S. economy recovering at brisk pace

Consumer spending, drop in inventories are catalysts

Growth rate 5.8% in 1st quarter

But analysts doubt speed can be sustained

April 27, 2002|By NEW YORK TIMES NEWS SERVICE

The economy grew this winter at its fastest pace in more than two years, the government said yesterday, delivering a clear sign that the recession has ended and that an expansion has started briskly.

But analysts said that growth was unlikely to continue at the 5.8 percent pace of the first three months of the year, pointing to signs that the economy has weakened slightly this month.

Most stocks fell yesterday as worries about profits and a report showing a small decline in consumer confidence outweighed the news that first-quarter growth exceeded even the most-optimistic predictions, analysts said. The Dow Jones industrial average closed below 10,000 for the first time since February, falling 124.34 points, to 9,910.72.

But there was no doubt that the economic downturn is over. Consumers, flush with large tax refunds and helped by low interest rates, continued to spend freely in the first quarter of the year.

Business executives eased off on the drastic reduction of excess inventories that had stemmed from fears the Sept. 11 attacks would deepen the recession.

And the federal government gave the economy a big push by increasing military spending at the fastest rate since the Vietnam War.

The 5.8 percent annual growth rate in the nation's economic output for the first quarter was up sharply from the 1.7 percent pace for the final quarter of last year. The Commerce Department report confirmed that few of last year's widespread economic fears had come true and that the recent recession, which officially began in March 2001 but has not been formally declared over, was one of the mildest since World War II.

"The recession is dead and gone," said Richard J. DeKaser, chief economist at National City Corp. in Cleveland. "We're now in the new expansion."

The expansion has yet to benefit most workers, however, because wage gains have remained meager in recent months, and businesses have continued to cut jobs to lift badly sagging profits. Moreover, the risk of wider conflict in the Middle East continues to generate fears that any sharp rise in oil prices could dampen the recovery.

The uncertainty has scrambled political calculations during a congressional election year. The end of the downturn may have taken a potential campaign issue away from Democrats, but Republicans remain wary of claiming victory over the recession until unemployment has begun to drop. President Bush's father, despite a victory in the war against Iraq, lost the 1992 election largely because of economic worries that haunted much of his term.

Speaking at his ranch in Crawford, Texas, Bush said he was still worried that the economy remained vulnerable to weakness. "I know we've got a lot of work to do," he said, arguing that Congress should ensure stronger growth by passing bills on trade, energy and terrorism insurance that he favors.

Still, the recent growth, the president said, is "a good sign that we're on the path to long-term recovery."

The speed at which the economy has begun growing again has surprised even most Wall Street forecasters, who generally err on the side of optimism. By one popular definition, the economy escaped recession altogether because it shrank for only a single quarter during the summer rather than two or more quarters.

But few economists doubt the recent downturn deserves to be called a recession, largely because 1.4 million jobs were lost over the past year as industrial production plunged.

As they did throughout the recession, consumers increased their spending in the first quarter. Spending rose 3.5 percent, down from 6.1 percent at the end of last year, but still at a pace considered strong. New spending on services and day-to-day purchases of less expensive items overcame a modest falloff in car and truck purchases.

Gillette Co., for example, said this week that sales of its Mach3 razors were better than it had expected. Online merchants Amazon.com and eBay had good quarters. Even car and truck sales have remained stronger than most executives expected, given how many people bought new vehicles late last year during big sales that featured zero-percent financing.

"All these predictions that people were not going to buy because of the end of zero percent just have not been true," said Frank A. Ursomarso, president of Union Park Automotive, which owns seven car dealerships in Wilmington, Del. "I guess people are figuring that they're in a better position than they thought they would be."

With the weather unusually warm and mortgage rates low, spending on housing construction - which is not included in consumer spending - jumped 15.7 percent, the biggest rise in six years.

Military spending also surged - growing at a 19.6 percent rate, the most since 1967 - as the war in Afghanistan continued and the Pentagon geared up for potential missions. State and local government spending increased at a 5.6 percent pace, but it is expected to fall in the next months as governments struggle to close budget deficits.

Businesses, trying to shake off the lingering effects of the spending binge of the late 1990s, have remained more conservative than consumers or the government, but executives showed some signs of changing course early this year. Spending on software and equipment was nearly flat, declining just 0.5 percent, in the first quarter, after falling significantly the previous four quarters. Without increases during the next months, however, the recovery is likely to be only modest.

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