Friday, May 27, 2005

GDP Grew 3.5% in First Quarter

Unemployment Claims Rise,But Are Below Expectations

DOW JONES NEWSWIRES May 26, 2005 10:22 a.m.

WASHINGTON -- The U.S. economy grew faster in the first quarter than first believed, partly because Americans didn't increase their foreign purchases as much as previously thought.

Corporate-profit growth slowed sharply in the first three months of 2005 and inflation was slightly weaker than originally thought.

Gross domestic product rose at a 3.5% annual rate January through March, the Commerce Department said Thursday in its first revision of economic growth for the quarter. GDP is a measure of all goods and services produced in the economy. The median estimate of 22 economists surveyed by Dow Jones Newswires and CNBC survey was for a 3.6% increase.

The government a month ago said GDP grew 3.1% last winter, far slower than the fourth-quarter's 3.8% pace. The revision upward to 3.5% was due to a smaller surge in imports.

"A downward revision to imports, which are a subtraction in the calculation of GDP, was partly offset by a downward revision to inventory investment," the Commerce Department said.

Corporate profits after taxes rose 1.0% January through March. Earnings grew 12.5% in the fourth quarter. Profits climbed 8.1% as compared with the first quarter of 2004.

Inflation gauges for the first three months of the year were mixed. The government's price index for personal consumption rose 2.1%, matching the previous estimate for the quarter but below the fourth quarter's 2.7% climb.

The price index for gross domestic purchases, which measures prices paid by U.S. residents, rose at a 2.9% rate, lower than the previously estimated 3.0% increase and the same as the fourth-quarter rate. The chain-weighted GDP price index increased at a 3.2% rate, less than the previously estimated 3.3% increase but above the fourth quarter's 2.3% climb.

For its first estimate of a particular quarter's GDP, Commerce makes assumptions for the various components of economic activity, including trade. In its original calculation of first-quarter GDP, the government's assumptions for March imports and exports were overly pessimistic. Thursday's data showed U.S. exports rose by 7.2%, instead of the earlier reported 7.0% increase.

Imports advanced by 9.1%, smaller than the originally estimated 14.7% rise. Fourth-quarter exports grew 3.2% and imports were up 11.4%.

GDP growth is reduced when the rate of increase of imports tops the rate of increase of exports. Thursday's report showed the trade component lopped 0.67 percentage points off GDP growth. The initial report a month ago had said trade cut GDP by 1.49 percentage points.

Commerce not only revised trade numbers but adjusted inventories as well. It said businesses expanded inventories by $68.4 billion, lower than the $80.2 billion accumulation first estimated but still above the fourth-quarter's $47.2 billion increase.

The $21.2 billion quarter-to-quarter change added 0.78 percentage points to GDP growth in January through March. Commerce originally estimated change for the quarter had added 1.21 percentage points to growth.

Analysts say the smaller $68.4 billion inventory accumulation figure for the first quarter implies less inventory drawdown in the second quarter, which runs April through June. And less drawdown could mean more production of goods for that quarter -- which, in turn, would give a boost to overall economic growth.

In other economic news Thursday, the Labor Department said new claims for unemployment insurance rose by 1,000 to a seasonally adjusted 323,000 last week. The four-week average climbed to a one-month high of 330,500 -- but that was well within the range economists associate with moderate job growth.

Wall Street expected a larger increase in initial claims. The average forecast of economists surveyed by Dow Jones Newswires and CNBC had called for a gain of 4,000 claims.

Although the volume of initial claims has fluctuated from week to week this year, the number has consistently stayed below 350,000 since the first week of January. Most economists, as a result, expect the job market to improve steadily.

U.S. employers added 274,000 jobs to their payrolls in April, and many forecasters say job growth is likely to be strong in May as well.

In its report, the Labor Department said the number of workers drawing unemployment benefits for more than a week fell in the week that ended May 14, the latest period for which data are available. That number -- known as continuing claims -- dropped by 22,000 to 2,574,000. The unemployment rate for workers with unemployment insurance held steady at 2%.

The GDP report said real final sales of domestic product -- that is, GDP less the change in private inventories -- advanced at a 2.7% annual rate in the first quarter. That was higher than the previously estimated 1.9% increase but below the fourth-quarter's 3.4% growth.

The biggest component of GDP is consumer spending, accounting for about two-thirds of economic activity. First-quarter spending climbed 3.6%, slightly up from the previously estimated 3.5% gain but below the fourth quarter's 4.2% advance. Purchases of durable goods increased 1.7% and nondurables rose 5.4%; previously, durables were seen as flat and nondurables seen up 4.9%.

Business spending rose 3.5%, down from the earlier estimated 4.7% increase and far below the fourth-quarter's 14.5% surge. Investment in equipment and software rose 5.6%.

First-quarter federal government spending went up 0.4%, a bit lower than the earlier estimated 0.6% climb; fourth-quarter spending went up 1.2%. State and local government outlays decreased 0.5%; it was earlier seen rising 0.5%. Fourth-quarter spending went up 0.6%.

Reports: GDP


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