hi guysReutersFirst-quarter growth strongThursday June 29, 5:12...

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Reuters
First-quarter growth strong
Thursday June 29, 5:12 pm ET
By Glenn Somerville

WASHINGTON (Reuters) - The U.S. economy grew at a revised 5.6 percent annual rate in the first quarter, as the fastest pace of growth in 2-1/2 years generated robust corporate profits, the Commerce Department said on Thursday.

The department pushed its estimate of first-quarter growth in gross domestic product up from 5.3 percent it reported a month ago.

But the core personal consumption expenditures price index was unrevised at up 2 percent, slowing from a 2.4 percent gain in the fourth quarter and implying controlled inflation.

Growth has slowed since the first quarter because higher gasoline prices and interest rates have nipped Americans in the pocketbook, while slower rates of appreciation in housing prices are expected to heighten caution about spending.

First-quarter GDP growth was more than triple the 1.7 percent pace posted in last year's fourth quarter and was the strongest since 7.2 percent in the third quarter of 2003.

Paul McCulley, managing director of bond fund PIMCO, told a Chicago investment conference the rousing 5.6 percent first-quarter rate of expansion was "probably the highest quarter you'll see for years" because growth was slowing.

FED SEES SLOWING

On Thursday, the Federal Reserve announced it was raising its trendsetting federal funds rate another quarter percentage point to 5.25 percent -- a 17th straight hike -- but noted recent signs that "economic growth is moderating."

Fed policy-makers said that, while some inflation risks remain, slower growth should ease inflation pressures, raising hopes its prolonged rate-rising campaign was near an end.

That, together with the GDP report showing strong profits and muted prices, helped fire rallies in both stock and bond markets.

The Dow Jones industrial average (^DJI - News) shot up 217.24 points to end at 11,190.80 while the high tech-laden Nasdaq Composite Index (NasdaqSC:^IXIC - News) gained 62.54 points to 2,174.38.

Bond prices rose in anticipation that Fed rate rises may soon end. Ten-year U.S. Treasury notes (US10YT=RR) were up 12/32s of a point for a yield of 5.20 percent while the 30-year Treasury bond (US30YT=RR) added 15/32s while their yield, which moves in the opposite direction from prices, eased to 5.25 percent.

Separately, the Labor Department reported that new claims for new weekly jobless pay climbed by 4,000 last week to 313,000 -- still a level that analysts say is consistent with a healthy job market.

The four-week moving average of new claims, which smoothes weekly volatility to offer a better picture of underlying labor market trends, fell by 6,000 last week to 305,500.

Treasury Secretary John Snow, in a final statement on growth before he is replaced by Henry Paulson at Treasury, said the GDP data underlined the effectiveness of tax cuts that Snow helped shepherd through Congress in 2003 after he took on the Treasury job.

Paulson was confirmed by the U.S. Senate on Wednesday and is expected to take over from Snow next week.

The GDP data showed consumer spending in the first quarter advanced at a revised but still sizzling 5.1 percent rate rather than 5.2 percent estimated a month ago, far ahead of the 0.9 percent rate recorded in the fourth quarter.

The department said its main reason for revising first-quarter GDP upward was that imports were not as strong as it previously had calculated. Imports, which act as a drag on overall GDP, rose at a 10.7 percent annual rate in the first quarter rather than 12.8 percent reported earlier.

Corporate profits also grew more strongly than the government previously thought, rising at a 13.8 percent annual rate after taxes instead of 8.8 percent it estimated a month ago. That matched the fourth quarter's rate of profits growth, which was the highest rate in four years.