Economy rebounds with 4.8% annual growth; inflation weakens
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Economy rebounds with 4.8% annual growth rate in Q1; inflation weakens

WASHINGTON -- Casting off an end-of-year lethargy, the economy bounded ahead in the opening quarter of this year at a 4.8% annual pace, the fastest pace of growth in 2 1/2 years.

The latest report on the economy, released by the Commerce Department on Friday, showed that consumers, businesses and government all did their part in terms of robust spending and investment to spur a healthy pace of growth in the January-to-March quarter.

The 4.8% increase in the gross domestic product marked a vast improvement from the feeble 1.7% annual rate registered in the final quarter of 2005, when fallout from the Gulf Coast hurricanes, including high energy prices, prompted people and companies to tighten their belts.

The GDP measures the value of all goods and services produced within the United States and is considered the best barometer of the economy's fitness.

"The economy is off to a strong start in 2006 and has fully rebounded from the fourth quarter's setback," said Stuart Hoffman, chief economist at PNC Financial Services Group

The first quarter's performance -- the best showing since the third quarter of 2003 -- was close to economists' expectations. Before the report was released, private analysts were forecasting the economy to clock in at a 4.9% growth rate.

Even with the economy zipping ahead in the first quarter, inflation moderated.

An inflation gauge closely watched by the Federal Reserve showed that core prices -- excluding food and energy -- rose by 2%, down from 2.4% in the fourth quarter.

The inflation reading, however, was taken before oil prices zoomed to a record high of more than $75 a barrel last week. Although prices have retreated since then, they still remain high.

A separate report from the Labor Department suggested that the strengthening job market isn't fanning inflation. Employers' cost to hire and retain workers -- wages and benefits -- rose 0.6% in the first quarter, the slowest pace in seven years. That mostly reflected less generous benefit packages.

To keep inflation at bay, the Fed is expected to boost interest rates again at its May 10 meeting, which would mark the 16th increase since June 2004. But after that, the central bank could take a break -- perhaps temporarily -- in its 2-year-old rate raising campaign, Fed Chairman Ben Bernanke suggested Thursday.

Bernanke and other Fed policymakers indicated that they want to proceed with caution because they don't want to hurt economic activity by pushing rates up too high.

In the first quarter, consumers -- critical players in the shape of the overall economy -- got their spending back in a more-normal groove. They boosted spending at a brisk rate of 5.5%, compared with paltry 0.9% pace in the fourth quarter. The first quarter's increase, the biggest since the third quarter of 2003, was led by spending on big-ticket goods such as cars.

But a third report showed that consumer sentiment fell in April as concerns about higher gasoline prices overshadowed a buoyant stock market and strong job growth.

The University of Michigan's final index of consumer sentiment for April was 87.4, down from March's final reading of 88.9 and April's preliminary reading of 89.2, said sources who saw the subscription-only report.

"Sentiment is finally beginning to show that consumers are getting a little bit unnerved about higher gasoline prices," said Brian Fabbri, chief economist at BNP Paribas in New York.

The median forecast of Wall Street economists polled by Reuters was for a 89.0 reading on the University of Michigan survey, according to a poll of 53 economists.

Another force helping the economy in the first quarter was business investment. Business spending on equipment and software grew at a whopping rate of 16.4%, the largest gain since the first quarter of 2000. Businesses also ratcheted up investment on buildings and plants. Such capital investment is another key to the economy's continued good performance.

With businesses feeling better about the economy, hiring has picked up. In March, the unemployment rate dropped to 4.7%, matching January's -- the lowest in 4 1/2 years.

Government spending also supported economic growth in the first quarter. This spending went up at a 3.9% pace, a turnaround from a 0.8% dip in the fourth quarter. Spending was strong at the federal level for both defense and non-defense. At the state and local level, government spending was flat.

Elsewhere in the GDP report, Americans' personal savings -- savings as a percentage of after-tax income -- dipped to negative 0.5% in the first quarter as consumer spending outpaced income growth. In the prior quarter, the savings rate stood at negative 0.2%.

Looking ahead, Bernanke said he expects the economy's growth to moderate in coming quarters but still be sufficiently strong to generate decent job growth. Risks to the mostly positive outlook, he said, could come from any prolonged runup in energy prices and sharp drop in housing activity. For now, neither scenario is envisioned.

Contributing: Reuters --- USA Today ~ Associated Press **
Economy rebounds with 4.8% annual growth rate in Q1; inflation weakens

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