US miracle gets even better

NEWS of the strongest growth for a year combined with the lowest inflation since Eisenhower was president showed that the astonishing performance of the American economy continued into the first quarter. The Asian crisis helped sustain the economic nirvana by trimming growth to a pace that would not force the Federal Reserve to raise interest rates, analysts said.

The markets celebrated. The benchmark 30-year Treasury bond jumped nearly one and a half points, and the Dow Jones index had gained 141 points to reach 9,092.77 by midday.

The gains helped the FTSE-100 closed higher in London. It was up 95 points at 5,928.3.

The first-quarter increase in GDP amounted to 4.2 per cent at an annual rate, the fastest growth since the same quarter last year. Consumer spending leapt by 5.7 per cent, more than double the previous quarter's rise.

Investment spending by businesses surged at a rate of nearly 18 per cent after a flat fourth quarter. Much of it was spending on computers, which climbed by 19 per cent to an annual rate of $296.4bn.

"Domestic demand went ballistic," said Ian Shepherdson, chief economist at HSBC Securities in New York.

The economy would have grown even faster were it not for the biggest ever drop in the contribution of exports less imports to growth. Events in Asia reduced exports by 3.4 per cent, while imports surged 11.6 per cent.

Yet at the same time inflation could not have behaved better. The GDP deflator, the widest measure of inflation, slowed down, rising just 0.9 per cent during the quarter. The deflator for domestic demand fell by 0.1 per cent, the first quarterly decline since 1959.

Separate figures for employment costs also rose less than expected, indicating that the tight jobs market has not caused a pick-up in pay rises. It rose by 0.7 per cent, down from its 1 per cent gain in the fourth quarter of 1997.

Much of the rise that did occur was down to increased health costs, according to a Bureau of Labour Statistics official. Health insurance costs were up 2.2 per cent in the 12 months to March, but the rise was offset by a drop in the cost of unemployment insurance.

Wall Street economists were swift to take the figures as evidence that the US economy has achieved a new pattern of high growth and low inflation. "It's an outmoded view that growth is dangerous because it accelerates inflation," said Philip Braverman of DKB Securities.