GDP Growth at Two-Year High

April 28, 2006 — -- The Commerce Department's Bureau of Economic Analysis says that the U.S. economy saw a big bump in activity during the first three months of the year -- the biggest in more than two years.

The report out this morning shows that the U.S. gross domestic product grew at an annual pace of 4.8 percent between January and March. That's the best performance since the middle of 2003 and is well above the disappointing performance seen in the fourth fiscal quarter of 2005 -- just 1.7 percent growth. Economists had been expecting growth around 5 percent.

This is the first of three reports on Q1 2006, so the number will be revised up or down during the next two months. The next revision is due May 25.

Today's release has some interesting numbers showing that consumer spending (+5.5 percent), business investment (+16.4 percent) and government spending (+10.8 percent) helped goose growth upward between January and March. Increases in U.S. exports (+12.1 percent) also helped move things along.

The high GDP number seems to indicate that businesses are finally beginning to spend their record profits. Since the 2001 recession, business has been hesitant to invest. Today's report shows that businesses are beginning to pick up some of the slack as consumers slow their spending growth.

The Federal Reserve System uses this data -- along with many other stats -- to determine whether an interest rate hike is needed. The governors raise rates to diffuse inflationary pressures. If the report shows inflation, you'll likely be spending more to maintain a credit card balance or borrow against your home.

In fact, today's report contains the Fed's "favorite" inflation gauge, known as the Personal Consumption Expenditures Price Index. This measure shows that prices increased at an annual pace of 2 percent during the first quarter. This level likely indicates that the Fed will once again raise rates at its June meeting … and then may pause at the following meeting for the first time in two years.

What Is GDP? The gross domestic product is the broadest measure of economic activity in the United States. The report measures the value of all goods and service produced in the country.