US Economy Grows Less Than Expected

The US economy grew at a robust rate in the first quarter, but less than anticipated by economists, figures showed today.

For the first three months of 2002, gross domestic product (GDP), which measures total output, grew at a 4.2% annual rate, the US commerce department reported. While 0.1% higher than the figure for the final quarter of last year, it was considerably less than the 5% pace Wall Street was expecting.

Economic growth was bolstered by spending by consumers, business and the federal government, especially on defence, partly because of the situation in Iraq and because of a general increase in military expenditure under the Bush administration.

Today's growth figures were consistent with expectations that the US Federal Reserve, the US central bank, will raise interest rates from their 46-year-low of 1% later this year. The Fed holds a meeting on interest rates next week, but few analysts expect an upward move as soon as that as it awaits further signs that growth is translating into more jobs.

In other data today, the US labour department reported that new filings for jobless benefits fell last week by 18,000 to 338,000, another sign that layoffs are easing.

Workers' wages and benefits grew by 1.1% in the first quarter, the biggest increase in a year, the department said in a second report.

After months of weak job figures, the economy added a hefty 308,000 jobs in March, the most in four years. But economists want to see net payroll gains in the range of at least 150,000 to 200,000 a month on a sustained basis.

Some economists believe the Fed will begin to raise rates in August, a few months before the presidential vote in November. In congressional testimony earlier this month, Alan Greenspan, the Fed chairman, prepared the ground for higher borrowing costs when he said that interest rates "must rise at some point to prevent pressures on price inflation from eventually emerging."

In today's growth data, a key measure of inflation pressures based on personal consumption expenditures - the PCE price index excluding food and energy that Mr Greenspan is known to monitor - virtually doubled. The price gauge climbed at a 2% annual rate after gaining 1.2% in the fourth quarter and 1% in the third quarter.

When it announces its decision next Tuesday, the Fed is likely to state that it now sees economic risks balanced between rising prices and slower growth in the period ahead, effectively pointing the way to higher borrowing costs.