MercoPress. South Atlantic News Agency

US economy going strong but inflation fears persist

The United States economy expanded 5.3% in the first quarter of 2006, its fastest growth rate in two-and-a-half years, according to a release this week from the US Department of Commerce.

The figure for the first quarter is more than triple the 1.7% growth rate recorded in the last quarter of 2005 and half a point above the initially forecasted 4.8% but below the 5.6% expected by markets.

In its report, the Commerce Department said that consumer and business spending and investment all helped drive the economy forward. However the main drag on growth is the US's huge trade deficit, which chipped 0.8% from first quarter growth. The US economy is set to grow at an annual 3.6% according to the Bush administration.

Earlier this week, the Federal Reserve chairman Ben Bernanke said he expected growth to slow to a more sustainable level with the main risks coming from a prolonged period of very high oil prices and a big slump in the housing market.

Bernanke hinted that the Fed might stop raising interest rates soon, but warned that inflationary pressures could change this strategy if energy prices continue to rise. Despite the strong growth seen between January and March, the most recent core inflation data, excluding food and energy costs slowed to 2% from 2.4% in the last quarter of 2005.

Investors remain worried about the potential for higher borrowing costs, which would put a brake on consumer spending and corporate investment, and so squeeze profits and jeopardize growth.

But consumer spending in April also expanded at its fastest in three months. Spending actually jumped 0.6% in April, the best since 0.8% last January, boosted by a 0.5% increase in incomes. But if energy costs are excluded spending rose 0.1% in April.

In related news the US financial press reported that US Treasury Secretary John Snow would be leaving his post in the coming weeks. The Washington Post quoting a source close to Mr. Snow said he would leave July 3.

US Treasury Secretary is scheduled to participate in the G-8 Economy ministers summit scheduled June 9/10 in Russia.

With mid term elections next November apparently Mr. Snow has been unable to convince US consumers they are enjoying an unprecedented economic prosperity.