GDP surprises on the up side (subject to revisions)
Gross domestic product accelerated from a 1 percent growth pace in the fourth quarter of 2000 to 2 percent in the first quarter of 2001 as a rise in consumer spending exceeded a drop in business investment and the first reduction of inventories in almost 10 years. With fourth quarter growth the slowest in 5 1/2 years, analysts had been anticipating a slow 1.2 percent annual rate of growth in the first quarter. Real final sales, which exclude inventories, rose 4.6 percent after rising at a 1.7 percent in the fourth quarter.

Consumer spending, which accounts for two-thirds of GDP, grew at a 3.1 percent annual rate in the first quarter, up from the 2.8 percent growth rate in the fourth. The increase reflected the largest rise in a year in spending on durable goods, such as autos, home appliances and other big-ticket items.

The economy drew little support from businesses at the start of 2001. Investment in equipment and software and equipment fell 2.1 percent rate after dropping 3.3 percent in the fourth quarter. The back-to-back declines were the first since the first half of 1991. Many firms seem to have large stocks of capital equipment already, suggesting that there may be an overhang of business equipment and software that could spell weakness in business spending for some time. Non-residential fixed investment, which includes commercial construction as well as business equipment and software, rose 1.1 percent. That was up from the 0.1 percent rate of decline in the fourth quarter.

Exports fell by $6.2 billion at an annual rate and imports shrank by $43 billion. That left a net trade deficit of $404.9 billion at an annual rate, down from $441.7 billion in the fourth quarter and the first improvement in the trade picture since the fourth quarter of 1996.

Inflation accelerated. The GDP price deflator, rose at a 3.2 percent annual pace. That compares with a 2 percent rate of increase in the fourth quarter. The personal consumption expenditures price index, a measure of inflation tied to consumer spending and closely watched by Federal Reserve policy makers, rose at a 3.3 percent annual rate, after a 1.9 percent gain in the fourth quarter.

Housing sales jump
Sales of both new and existing single family homes soared in March, showing that housing has been relatively unscathed by the slowing economy. New home sales rose 4.2 percent last month to 1.02 million units at an annual pace from an upwardly revised February rate of 980,000 units. The March increase was the largest since sales rose 13.1 percent in December. By region, sales increased Northeast, Midwest and South, but fell in the West. Sales of existing single family homes jumped by 4.8 percent, the second highest monthly pace on record, to a seasonally adjusted annual rate of 5.44 million units, according to the National Association of Realtors.

An unemployment rate of 4.3 percent, close to a 30-year low, and mortgage rates that are hovering around 7 percent apparently buoyed sales so far this year. Momentum of lower interest rates and the fact that the unemployment rate hasn't picked up too much carried the first quarter. The main reason housing has avoided an all-out decline has been that mortgage rates are still lower than last year. Another reason is that some people may want investment alternatives to the stock market and home prices are still appreciating in many markets.

No hint of a capital spending revival
New orders for durable goods rose for the first time this year in March thanks to a volatile transportation-led increase that is unlikely to lift manufacturing from its slump. The 3 percent gain followed declines of 0.3 percent in February and 7.3 percent in January. Excluding transportation, orders fell 1.8 percent to the lowest level since June 1999.

So far this year, orders including transportation are down 6.2 percent from the first three months of 2000. Manufacturing has been in decline since August, based on surveys of purchasing executives, and today's numbers give no hint of an imminent recovery. And the report extends the trend of continued weakness in capital spending as businesses are deferring capital spending as a means to protect profitability.

In lowering interest rates last week, Federal Reserve policy makers cited concerns about weaker capital spending. Industrial production, for example, was little changed in March, except for a rebound in auto production. This perception was underlined by the durable orders data.

ECI also rises
First quarter labor expenses accelerated as wages and benefits such as health insurance increased. The employment cost index rose 1.1 percent in the quarter ended March 31 after rising 0.9 percent in the previous three months. Labor costs rose 4.1 percent in the 12 months ending in March. That compares with a 4.3 percent rise in the 12 months ending in March of last year. The employment cost index measures the cost to companies of employing a given worker at a given time, with adjustments to cost increases spread over the course of a year. The ECI incorporated new seasonal adjustment factors. Data for 1996 through 2000 were revised to reflect the updated seasonal adjustment.