Surge in US growth puts Fed on rate alert

Undeterred by a ferocious winter, government shutdowns and the worst strike at General Motors in a quarter of a century, the US economy expanded far more strongly than expected in the first quarter. The news is an election-year boost for President Clinton, but a signal that the next interest rate move by the Federal Reserve may be an increase rather than a cut.

According to provisional figures from the Commerce Department yesterday, gross domestic product grew by 2.8 per cent, far more quickly than the feeble 0.5 per cent recorded in the last three months of 1995. The strong performance suggests that current forecasts of a bare 2 per cent growth for the year - the IMF last month predicted 1.8 per cent expansion - are decidedly on the conservative side.

The growth seems to have been across the board, led by a surge in consumer spending, up 3.5 per cent, and a 12 per cent jump in fixed corporate investment. The inventory reductions by business which braked the economy in the last part of 1995 also seem to be over, analysts said.

Without the severe weather, including the record blizzard which shut down the North-east for a week in January, and the government lay-offs caused by the protracted budget dispute, growth would have been 0.2 per cent higher still, the Commerce Department estimated.

In a further sign of better times ahead, factory orders also rose strongly in March - by 1.5 per cent, almost double what had been expected by Wall Street.

For the seventh month running, US industry's backlog of unfilled orders rose, by 1 per cent during the month.

For President Clinton the growth resurgence has come at a perfect moment. Not only will it strengthen the White House case that the economy is in capable hands as the election approaches, but should also help to dispel public anxieties over jobs and corporate downsizing.

The one potential area for worry is inflation. While consumer prices are advancing at a modest 2.5 per cent or so, the implicit GDP deflator rose 2.1 per cent in the first three months, up from 1.8 per cent in the last quarter of 1995.

Most of the acceleration reflected a temporary jump in energy prices, but the Fed will be none the less watchful for that.

At the very least, a fourth successive cut in short-term rates now looks out of the question. "The overall level of economic activity is going to get people taking about a Fed tightening," Steve Ricchiuto, financial economist for Barclays de Zoete Weld, commented yesterday.