Boomlet

29 May 2006



US GDP Rises 5.3% in First Quarter

The US Commerce Department has revised the latest quarterly GDP figure for the economy. The annual rate for the first quarter of 2006 was moved up to 5.3%, a half a percent higher than the initial estimate of 4.8%. This is the strongest result since the third quarter of 2003, but it isn’t going to last. Oil prices and other worries aren’t behind the coming “slow down” either. Instead, the high rate of growth is making up for a lousy fourth quarter 2005, nothing more.

The fourth quarter of 2005 had growth less than one-third that of first quarter 2006. The big reasons were named Katrina and Rita. They hit as August was giving way to September, and a great deal of economic activity didn’t happen into October and November. The result was demand that didn’t get satisfied. Like water behind a dam, pent-up demand eventually bursts through whatever obstacles are in the way. Purchases were deferred rather than cancelled, and that explains the 5.3% growth rate that is unsustainable in a developed economy like America’s.

Consumers, who didn’t provide a blockbuster Christmas for retailers and others, boosted their spending 5.2% in the first quarter, off from the initial 5.5% estimate, but still very strong. Of course, this isn’t all good news. Since income didn’t grow at the same pace (real disposable personal income grew to an estimated 2.1% pace in the first quarter way down from 5.1% in the fourth), the personal savings rate dropped to a negative 1.3% in the quarter ended March 31, 2006. Americans’ inability to save is one of the things that keeps global economists awake at night.

Businesses spent like drunken sailors as well at 13.8% in the first quarter. Inventories rose $32.3 billion on an annual basis, a little less than the $37.9-billion rate in the fourth quarter, but still more than healthy. After-tax profits climbed 8.8%, which was actually slower than in fourth quarter 2005’s 13.8%. Still, businesses are quite profitable.

Although in the time period under consideration oil hit all-time nominal highs, the rate of inflation remains a sedate 2%, right around where the Federal Reserve believes it should be (and a rate this journal believes to be dangerously low in time of terror threats and a coming hurricane season for which the nation is sadly unprepared). Demand is up, profits are up, inflation is down – just like when Mr. Clinton was president.

© Copyright 2006 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent. Produced using Fedora Linux.

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