U.S. economic growth still strong in early 2000

By by DARYL DELANO, Delano Data Insights -- Modern Materials Handling, 6/1/2000

U.S. economic growth continued strong-undoubtedly too strong for the Fed's liking-during the first quarter of this year. The Commerce Department's preliminary estimate of U.S. inflation-adjusted economic growth (the change in "real" Gross Domestic Product) for the first three months of 2000 came in at 5.4%. Although this was down from the exceptional 7.3% gain recorded during the final three months of 1999-and the merely outstanding third quarter 1999 expansion of 5.7%-it was still well above the 4.2% average annual gain registered during 1997-1999.

Policy makers at the Federal Reserve Board have made it clear that they consider GDP growth in the 3.5%-4.0% range to be reasonable and sustainable in the current environment of solid productivity growth. Quarterly economic expansion at a rate consistently above this threshold or presumptive speed limit is seen as a sign of an overheated economy. And the Fed is committed-indeed, legislatively required-to pursue a monetary policy that counterbalances the price and wage inflation that historically comes with a period of overheated economic growth.

Overall consumer spending grew at an annual rate of 8.3% during the first three months of 2000-the strongest quarter of growth in consumer expenditures since the second quarter of 1983. Total business spending for new plant and capital equipment-including new buildings, software, materials handling equipment, etc.-grew at an astounding 21.1% annual rate during the first quarter of this year, following a subdued gain of only 2.9% during the fourth quarter of 1999. And capital spending for machinery and equipment rose at a 23.7% annual rate.

In the Alice-in-Wonderland world of economic policy, extremely good news on economic growth is very, very bad news for interest rates, the stock market, and monetary/fiscal policy. Arguably the worst number coming out of the GDP report concerned the continued acceleration in the rate of inflation. The price index for gross domestic purchases increased at a 3.2% annualized rate during the final quarter of last year. This represented the highest rate of inflation recorded by this most comprehensive measure of materials and wage price change since this economic expansion began more than 9 years ago.

Economic growth won't continue at this level-the Fed simply won't tolerate it-and eventually higher interest rates will begin to "bite" both consumers and businesses. But unless

policy makers seriously overplay their hand, there's still no reason to believe that the U.S. economy will be driven into the bankruptcy of recession by higher interest rates. Slower but still sustainable economic growth-the oft-referenced soft landing-is the Fed's goal. And there's no reason to believe that we can't-and won't-be able to realize this in the quarters ahead. And from there continue this extraordinary period of economic expansion for at least a couple more years.