Spending Spree Powers Growth Gdp Shoots Up 2.8 Percent During First Quarter

The economy is surging back to life, gratifying the White House but jolting Wall Street. Powered by a heavy spending for business computers and consumer goods, growth accelerated to 2.8 percent in the first three months of the year in spite of blizzards, government shutdowns and a major auto strike.

The White House, hoping for a strong economy in an election year, was ecstatic, but financial markets tumbled, fearing the stronger-than-expected growth will force the Federal Reserve to start raising interest rates.

“This is plain and simple good news for the American economy and more evidence that the president’s economic strategy is paying off,” said Laura Tyson, head of President Clinton’s National Economic Council.

Private analysts agreed that the surprisingly strong increase in the gross domestic product - the nation’s total output of goods and services - depicted a sizable rebound from a barely discernible 0.5 percent GDP gain in the fourth quarter of 1995.

“The economy is cooking,” said Allen Sinai, chief global economist at Lehman Brothers in New York. “This report says business is terrific and life for American workers is going to be much better this year than last year in terms of job availability and higher pay.”

While that is just what an incumbent president facing voters in November would like to hear, financial markets saw clear risks.

Investors fretted that the economy is growing too rapidly for the sixth year of an economic expansion and this will force the Federal Reserve to cool things off with higher interest rates.

The Dow Jones industrial average was down more than 100 points late in the day and closed down 76.95. A huge sell-off in the bond market pushed the yield on the benchmark 30-year Treasury bond above 7 percent, its highest level in a year.

“The market is clearly worried that the Fed will have to slam on the brakes,” said David Wyss, chief financial economist at DRI-McGraw Hill Inc.

Wyss said that without the adverse effects of the General Motors strike, the government shutdown and the snowstorms, the GDP would have expanded at a phenomenal rate of 4.4 percent in the first three months of the year, double the speed limit that Federal Reserve Chairman Alan Greenspan has set for sustainable, non-inflationary growth.

Some analysts said the Fed could begin raising rates as early as its next meeting on May 21, but others said a rate increase would only come then if inflation showed signs of worsening dramatically.

Gasoline and food prices have been surging in recent weeks, but Tyson insisted that the administration saw no reason to change its forecast of “steady growth and moderate inflation for the balance of 1996.”

An inflation index tied to the GDP showed only a moderate pickup in the first quarter, rising by 2.5 percent.

Further information on the economy will come today with release of the unemployment report for April. The jobless rate in March was 5.6 percent.

In a separate report Thursday, the Labor Department said that new claims for unemployment benefits declined by 24,000.

A third report also showed strength as orders to U.S. factories rose by 1.5 percent in March, the first increase this year.

The central bank pushed rates higher in 1994 and early 1995 as a preemptive strike against inflation but reversed course last July when the economy appeared to be tumbling into a recession and cut rates three times.