GROWTH BEATS FORECASTS; CONSUMER VERVE DRIVES DOMESTIC OUTPUT HIGHER THAN EXPECTED.

Byline: Jeannine Aversa Associated Press 

Torrid consumer spending helped the nation's economy grow at a brisk annual rate of 4.3 percent at the beginning of the year. Economists believe growth has slowed in the current quarter but probably not enough to dissuade the Federal Reserve from raising interest rates as a precaution against inflation.

The 4.3 percent increase from January through March in the gross domestic product - the nation's output of goods and services - was slightly better than the 4.1 percent rate estimated a month ago, the Commerce Department said Friday.

The improvement reflected a slight revision in the trade deficit, which, while still at a record high, was $6.5 billion lower than the government earlier estimated.

The economy's robust first-quarter pace was far above expectations. That has raised concerns that the Federal Reserve will push up short-term interest rates at its meeting next week to keep the expansion from triggering inflation.

Even though many analysts believe that growth has slowed in the April-June quarter to around 3.5 percent, they feel the drop has not been sufficient to keep the central bank from raising interest rates next week. Some analysts said solid second-quarter growth could spur the Fed to enact another rate increase at its August meeting.

``My hunch is that they would raise the interest rates again on Aug. 24,'' said First Union economist David Orr, who estimates second-quarter growth to slow only to 4 percent to reflect a slowdown in consumer spending.

``The benefit of refinancing is running out. The benefit of lower gasoline is running out, and higher tax refunds are going away,'' Orr said, explaining his second-quarter assessment. ``The superchargers for consumer spending have faded a bit.''

Economist Mark Zandi of Regional Financial Associates also expects a pullback in consumer spending to lower the second-quarter growth rate. He believes the Fed will maintain its existing policy bias toward increasing interest rates ``until there is a clear, sustained slowing in the economy.''

In the first quarter, robust consumer spending, which continued to power economic growth, rose at an annual rate of 6.7 percent, the best showing in more than a decade, the government said.

Financial markets have grown increasingly nervous in recent weeks that the Fed will raise interest rates, a pre-emptive move to keep inflation at bay.

The GDP report indicated that inflation remains low. An inflation gauge tied to the GDP rose at an annual rate of just 1.2 percent in the first quarter, compared with the 1.1 percent previously estimated.

The record trade deficit, meanwhile, shaved 2.2 percentage points from economic growth in the first three months of the year. While at record levels, the drag from trade was slightly lower than an estimated loss in growth of 2.5 percentage points in last month's report.

The surging trade imbalance reflects the impact of the global financial crises, which has cut sharply into American export sales while increasing competition on American manufacturers from a flood of cheaper imports.

Spending for new homes and apartments increased at a 15.4 percent rate in the first quarter, the best showing in a year.

However, in a separate report, the National Association of Realtors said Friday that sales of existing single-family homes plunged 4 percent in May to a seasonally adjusted annual rate of 5.04 million units. That was the lowest level in six months. The drop coincided with rising mortgage rates.

The GDP report showed that business investment, spending on new equipment and plants, rose at an annual rate of 8.5 percent in the first quarter, even better than last month's estimate of 7.9 percent growth.

CAPTION(S):

Chart

CHART: GROSS DOMESTIC PRODUCT UP

The GDP measures all the goods and services produced by workers and capital located in the United States, regardless of ownership.

Source: Department of Commerce

Associated Press