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GDP Jumps 4.8 Percent in First Quarter

Prof. Peter Morici - 5/1/2006

The Commerce Department announced today that GDP grew at a 4.8 percent annual rate in the first quarter. This confirmed the consensus forecast, which was also 4.8 percent.

This remarkable pace was partially catch up from the 1.7 percent growth posted in the fourth quarter but also reflected fundamental shifts in the sources of demand. Business investment is increasingly the engine pulling the economy forward.

Consumption continued to grow solidly, expanding at a 5.5 percent annual pace in the first quarter; however, investment in equipment and software jumped 16.4 percent and nonresidential construction expanded 8.6 percent. The residential sector continued to cool, with housing construction expanding 2.6 percent in the first quarter after growing only 2.8 percent in the fourth quarter.

With consumers saddled with debt and bearing higher gas prices, business investment in equipment and software and commercial construction will power the expansion going forward or the economy will falter.

The trade deficit continues to drag on the economy. With crude oil prices soaring and China investing in new export capacity at a breakneck pace, the trade deficit will continue to pull down U.S. growth. Without a devaluation of the dollar against the Chinese yuan, U.S. growth will slow significantly in the second half of this year.