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slow news is good news Slow news is good news
First-quarter economic growth is revised up but the number is below forecasts, reducing fears of inflation.
By Chris Isidore, CNNMoney.com senior writer
May 25, 2006: 11:04 AM EDT


NEW YORK (CNNMoney.com) - The economy grew faster than originally thought in the first quarter, the government said Thursday, but the modest revision cheered investors who had become worried that an overheating economy would bring inflation and more Federal Reserve rate hikes.

Gross domestic product, the broadest measure of the nation's economy, grew at a 5.3 percent annul rate in the first quarter, the Commerce Department reported.

While that was the best rate of growth since the fourth quarter of 2003, and up from the 4.8 percent rate that the government estimated last month, it was well below the average forecast of 5.8 percent from economists surveyed by Briefing.com. One estimate had been for a 6.2 percent growth rate and several economists had been looking for a gain of 6.0 percent.

Consumer spending, which accounts for about 70 percent of the economy, grew at a 5.2 percent annual rate in the first quarter, down from the original reading of 5.5 percent.

The downward revision in consumer spending was largely responsible for the GDP reading coming in below most forecasts, according to Anthony Chan, chief economist for JPMorgan Private Client Services.

Chan and others said the report was positive for financial markets because it should calm inflation fears and give the Federal Reserve more flexibility to not raise rates at its meeting in late June.

On Wall Street, stocks rose in morning trading on hopes that the Fed might leave rates unchanged at its meeting in late June, which would be the first pause by the central bank after 16 straight rate hikes over two years.

"Slower growth is better. It takes the pressure off for an increase in June," said Robert G. Smith, founder and chief investment officer of Smith Affiliated Capital, a New York investment advisory firm. "You're just slowly winding down the economy here. There's no free fall. The markets are enjoying this."

The report wasn't the only one showing reduced risk of an overheating economy.

Initial jobless claims fell less than expected for the week ending May 20, a sign the labor market isn't getting too tight, while the sales of existing homes slowed further in April, coming in near forecasts.

The home sales report was the latest sign of a cooling real estate market. Strength in real estate has helped fuel the economy, and the job market, in recent years.

A closely watched inflation reading in the GDP report, measuring prices paid by consumers for items other than food or energy, rose at a 2.0 percent annual rate in the quarter, unchanged from the government's initial reading, which also helped lessened inflation fears in the markets.

"This is definitively one of the best case scenarios anyone could hope for," Chan said. "The 5.3 percent growth is still strong, and the 2.0 percent is definitely still in the sweet spot for the Fed. This makes Goldilocks look good."

Chan said that he believes the report increases the chance that the Fed will not raise rates in June, although he said some key economic numbers between now and then, such as the May job reports and additional inflation readings, will be critical.

"We didn't see any aspects in this report troubling in any way," he said. "We didn't see prices running off to races; we didn't see consumer spending with any upward revision.

"In fact I think we're seeing some real weakening signs on the consumer side. These numbers are consistent with a scenario where the Fed will feel comfortable with the pause."

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The Fed has its hands full: Full story.

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