South-Westerns' Economic News Summaries
U. S. Economic Activity Pops
Topic Productivity and Growth
Key Words Consumer Spending, Business Spending, Government Spending and Economic Growth

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Reference ID: A145089244
News Story

The U.S. Gross Domestic Product (GDP), a broad measure of the economy's overall performance, grew at a 4.8 percent annualized rate in the first quarter of 2006. The government spent more on national defense. Businesses spent more on office buildings, industrial equipment and transportation equipment. Finally, consumers bought more computers, furniture, and cars.

Businesses and consumers spent with remarkable vigor in the first quarter of 2006. Businesses boosted their investment spending by 14.3 percent in the first quarter of 2006--the biggest increase since the second quarter of 2000. In the meantime, consumers expanded their spending rate by 5.5 percent over the last quarter of 2005. Government spending also contributed to the increase in economic activity, mostly because of a 10 percent increase in spending on national defense.

Some consider the burst of growth in the first quarter of 2006 to be simply a snapback from the last quarter of 2005, when automakers phased out their incentive programs, Hurricanes Katrina and Rita laid waste to the Gulf economy, and spiking oil prices served to slow economic growth to 1.7 percent. "You are seeing a nice rebound form the hurricane-distorted fourth quarter, with strength broadly based across the economy," said Lehman Brothers' Chief U.S. economist Ethan Harris. On the other hand, President Bush said that the report showed that the country was "on the fast track" and called on Congress to make his tax cuts permanent. "The surest way to put the brakes on the economy is to raise taxes or spend too much of the taxpayers' money here in Washington," he said at the White House. For typical Americans, the rapid economic growth translates into more jobs and modestly increasing wages as the business sector exhibits confidence that the economy will continue to grow. The question now on many analysts' minds: Will increasing interest rates and higher energy prices dampen the growth?

The index of consumer expectations, published by the University of Michigan, reported that, despite their spending spree in the first three months of the year, American consumers are showing signs of fatigue--resulting in a declining index for April. The index fell to 87.4 in April from 88.9 in March, mostly reflecting higher gasoline prices. "A majority of households now expect an economic downturn and bad financial times by the end of this year," said Richard Curtin, the director of the University of Michigan's Survey of Consumers. Still, with inflation remaining modest, payrolls increasing, and the number of jobs increasing, consumers certainly have ample fuel to continue their spending. Thus, many economists expect any slowing in the economy to be gradual and mild. They note that gasoline prices, while rising, make up less than 5 percent of household budgets today.

Businesses' willingness to spend rising corporate profits to increase capacity and hire workers marks an important turning point in economic activity, because the expansion in the past has been fueled largely by consumer spending. "You have a very healthy corporate sector and it is gradually emerging from its hibernation," said Lehman Brothers' Harris. "Business investment spending is showing up in projects for new factories, offices and hospitals," said Kenneth Simonson, chief economist of the Associated General Contractors of America. "Everywhere people seem to be upbeat and extremely busy," he said. Mr. Harris concurs, saying "Clearly the economy still has plenty of momentum with a little hint of inflation risk in the background."

Questions
1.

Define GDP and compare the two ways in which it can be calculated.

2. Use any source available to break down business investment spending into three broad categories.
Source Vikas Bajaj, "U.S. Economic Growth Rises Sharply", The New York Times Online, April 28, 2006 and Eduardo Porter and Vikas Bajaj, "Economy Sets Fastest Pace Since the Summer of 2003",The New York Times Online,April 29, 2006
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