First-quarter GDP another scorcher

CBS.MarketWatch.com ^ | Apr. 23, 2004 | Rex Nutting

[TopQuark]

First-quarter GDP another scorcher

By Rex Nutting, CBS.MarketWatch.com Last Update: 6:49 PM ET April 23, 2004

WASHINGTON (CBS.MW) -- For the third quarter in a row, U.S. economic growth has exceeded all expectations.

Following a blowout third quarter and a very strong fourth quarter, most economists expected the economy to pause just a bit in the first three months of 2004.

Instead, growth apparently accelerated, boosted by consumer spending, business investment, housing and inventory stocking.

The first estimate of first-quarter growth will be released by the Commerce Department on Thursday morning. The report is the highlight of another fairly busy week on the economic calendar.

Economists surveyed by CBS MarketWatch expect, on average, annualized growth of 5 percent in the first quarter after 4.1 percent growth in the fourth quarter and 8.2 percent in the third. See Economic Calendar.

It would be the first time in 10 years that growth exceeded 4 percent for three straight quarters.

"With the Fed now in play, financial market sensitivity to indicators of economic growth and inflation has increased," said Peter Kretzmer, senior economist for Banc of America Securities. "The advance GDP report looms as a key potential source of volatility prior to the May 4 [Federal Open Market Committee] meeting."

"The GDP figures will provide a bit of a test case for markets," agreed Joe Abate, an economist for Lehman Brothers.

Along with the stronger growth, the bond market will be paying close attention to the inflation gauges that accompany the GDP report. The core personal consumption expenditure deflator (a favorite of Federal Reserve Chairman Alan Greenspan) is expected to rise at a 1.7 percent annual rate in the quarter, up from 1.2 percent in the fourth quarter, Abate said.

"We've had a lot of false starts," said Diane Swonk, chief economist for Bank One. But finally, "the recovery is getting more rooted. We now have extremely strong growth."

Growth was well balanced in the first quarter, economists figure. Although they don't have all the monthly details just yet, it's clear that consumer spending and business investment maintained momentum during the quarter. Inventory restocking probably added significantly to growth. Housing was less a factor than in earlier quarters, but still contributed to growth.

There's more to come, Swonk said. She figures economic growth will accelerate in the second half of the year, despite losing the boost from income tax cuts and mortgage refinancing cash-outs.

Businesses will likely expand investments in coming quarters. "We have a lot of catching up to do," she said. Plus, an investment tax incentive for small businesses will expire at the end of the year, causing a rush of investments beforehand. Consumer spending should remain healthy as more jobs are created, she said.

Swonk is slightly more optimistic than the consensus, which sees growth "slowing" to about 4 percent in the second half of the year.

"The backup in interest rates is already beginning to take some of the froth off of financial conditions, which have been more supportive than at any time in the past two decades," said Robert DiClemente, economist for Citigroup Capital Markets. "Nevertheless, underlying growth likely will remain solid (the 4 percent to 4.5 percent range) for the foreseeable future."

Such growth, while not favorable for bond investors, should be good for equities. However, stock market investors seem to be letting fears of higher interest rates overshadow strong corporate earnings.

After adjusting to the prospect of interest rates climbing from their abnormally low levels, investors should realize that rising profits could still support higher equity prices this year," said Lynn Reaser, chief economist for Banc of America Capital Management. "A strengthening in pricing power should help profit margins, while interest rates are likely to remain moderate."

Other data

Mortgage have risen off their lows, but Realtors and mortgage bankers still expect another banner year. Data on new home sales and existing home sales for March will be released this coming week. Sales are expected to remain at lofty levels in March.

Consumer confidence has suffered from high gas prices, anemic hiring and wage growth, a stagnant stock market, and lingering fears and doubts about terrorism. Economists don't expect much change in either the Conference Board or University of Michigan surveys for April to be released in the coming week.

Consumer spending probably bounced higher in March, rising about 0.8 percent after 0.2 percent in February. Incomes, meanwhile, probably rose half as fast.

An early peek at the April data comes Friday morning with the Chicago purchasing managers index. Economist look for a small gain from a very strong level.

Rex Nutting is Washington bureau chief of CBS.MarketWatch.com.

[bcoffey]

It would be the first time in 10 years that growth exceeded 4 percent for three straight quarters.

Tom Daschle is deeply saddened.

John Kerry is just clueless.

[comebacknewt]

At some point, consumer confidence is going to start soaring again. Once it does, look for GWB to finally pull away.

[Balto_Boy]

And the mainstream media is sad that, thanks to the Internet, they can no longer keep us from learning about this.

[teletech]

It would be the first time in 10 years that growth exceeded 4 percent for three straight quarters.

Tom Daschle is deeply saddened.

John Kerry is just clueless.

John Kerry is just clueless. So much so that he still thinks there is a better way. Day by day more and more people see that John Ketchup Boy Kerry is the wrong choice for America.

[Army Air Corps]

If Daschle is saddened, then Err America must be, collectively (of course), soiling their underwear in disbelief; that is, after someone reads the story to that gaggle of barely literate halfwits.

[randog]

This will not reach the nightly news. The abortion rallies, however, will. Americans just don't care about their wallets and purses when a woman's "right to choose" is at risk.

</dan rather>

[Old Grumpy]

It'll be interesting to see how Kerry will deal with this news.

[Luis Gonzalez]

I thought we were destroying our economy with outsourcing?

[ride the whirlwind]

Mahvelous!

John Kerry is just clueless.

Hey John, why the long face?

[ChadGore]

GOOD NEWS FOR AMERICA ?

"I'm
deeply
saddened"

[Luis Gonzalez]

"I actually did say that the economy was great, before I said that it was bad."

[driftless]

"No, no", say the Dems.. denying reality (never their strong point), "for good economic growth we must tax the bejesus out of Americans. It's just impossible for the economy to grow with Americans keeping more of their savings instead of giving them to politicians to flush down various ratholes"...or so say all the great lib economic ahem "geniuses" who assured us that tax cuts wouldn't help the economy.

[groanup]

"And the mainstream media is sad that, thanks to the Internet, they can no longer keep us from learning about this"

Yes. Well put. If it were bad news it would lead the network news. Since it is good news it may or may not get an airing.

[teletech]

If Daschle is saddened, then Err America must be, collectively (of course), soiling their underwear in disbelief; that is, after someone reads the story to that gaggle of barely literate halfwits.

The Err America crowd probably read this story and asked - What's a GDP?

[axel f]

"I actually did say that the economy was great, before I said that it was bad."

LOL

You know, making fun of that quote never gets old.

[Petronski]

I used to think making fun of that quote would get old, but now I know making fun of that quote never gets old.

[Biblebelter]

There is nothing wrong with the consumer, the consumer is spending like there is no tommorrow, obviously spending money he does not have. If this economy can only improve by more consumer spending, then it is not going to improve. The problem is that corporations are sitting on vast sums of capital. Microsoft has close to 60 billion in cash. It would help the economy if it would return some of that to its stockholders or at least reinvest it in enterprises in this country which could help create jobs.

[TopQuark]

It would help the economy if it would return some of that to its stockholders or at least reinvest it in enterprises in this country which could help create jobs.

It's not really cash, is it? It's "cash and marketable securities;" i.e., certificates of deposite and other notes. So this "cash" is in the economy: it is being lent by banks to businesses and consumers.

Also, it the consumer/shareholder were short on cash, he would demand at a shareholder meeting that the dividend be paid. None requested this measure.

[comebacknewt]

I'm not so much looking for an increase in consumer spending. Instead, I am hoping that more voters start to realize that the economy is indeed expanding and that the growth is real and sustainable. We still have a number of doubters out there.

Once they start coming on board, then GWB's poll numbers will shoot up.