Economic and Financial Developments in 2001

The expansion of U.S. economic activity maintained considerable momentum through the early months of 2000 despite the firming in credit markets that has occurred over the past year. Only recently has the pace of real activity shown signs of having moderated from the extremely rapid rate of increase that prevailed during the second half of 1999 and the first quarter of 2000. Real GDP increased at an annual rate of 5-1/2 percent in the first quarter of 2000. Private domestic final sales, which had accelerated in the second half of 1999, were particularly robust, rising at an annual rate of almost 10 percent in the first quarter. Underlying that surge in domestic spending were many of the same factors that had contributed to the con-siderable strength of outlays in the second half of 1999. The ongoing influence of substantial increases in real income and wealth continued to fuel consumer spend-ing, and business investment, which continues to be undergirded by the desire to take advantage of new, cost-saving technologies, was further buoyed by an accel-eration in sales and profits late last year. Export demand posted a solid gain during the first quarter while imports rose even more rapidly to meet booming domestic demand. The available data, on balance, point to another solid increase in real GDP in the second quarter, although they suggest that private household and business fixed investment spending likely slowed noticeably from the extraordinary first-quarter pace. Through June, the expansion remained brisk enough to keep labor utilization near the very high levels reached at the end of 1999 and to raise the factory utilization rate to close to its long-run average by early spring.
Inflation rates over the first half of 2000 were elevated by an additional increase in the price of imported crude oil, which led to sharp hikes in retail energy prices early in the year and again around midyear. Apart from energy, consumer price inflation so far this year has been somewhat higher than during 1999, and some of that acceleration may be attributable to the indirect effects of higher en-ergy costs on the prices of core goods and services. Sustained strong gains in worker productivity have kept increases in unit labor costs minimal despite the per-sistence of a historically low rate of unemployment.
The Household Sector
Consumer Spending
Consumer spending was exceptionally vigorous during the first quarter of 2000. Real personal consumption expenditures rose at an annual rate of 7-3/4 percent, the sharpest increase since early 1983. At that time, the economy was rebounding from a deep recession during which households had deferred discretionary pur-chases. In contrast, the first-quarter surge in consumption came on the heels of two years of very robust spending during which real outlays increased at an annual rate of more than 5 percent, and the personal saving rate dropped sharply.
Outlays for durable goods, which rose at a very fast pace in 1998 and 1999, accel-erated during the first quarter to an annual rate of more than 24 percent. Most notably, spending on motor vehicles, which had climbed to a new high in 1999, jumped even fur-ther in the first quarter of 2000 as unit sales of light motor vehicles soared to a record rate of 18.1 million units. In addition, households\' spending on computing equipment and software rebounded after the turn of the year; some consumers apparently had postponed their purchases of these goods in late 1999 before the century date change. Outlays for nondurable goods posted a solid increase of 5-3/4 percent in the first quarter, marked by a sharp upturn in spending on clothing and shoes. Spending for consumer services also picked up in the first quarter, rising at an annual rate of 5-1/2 percent. Spending was quite brisk for a number of non-energy consumer services, ranging from recreation and tele-phone use to brokerage fees. Also contributing to the acceleration was a rebound in out-lays for energy services, which had declined in late 1999, when weather was unseasona-bly warm.
In recent months, the rise in consumer spending has moderated considerably from the phenomenal pace of the first quarter, with much of the slowdown in outlays for goods. At an annual rate of 17-1/4 million units in the second quarter, light motor vehi-cles