By John S. McClenahen First-quarter 2004 U.S. GDP growth, although well above its 3.5% long-term average, came in a lot lower than expected. Inflation-adjusted GDP, the output of goods and services produced by labor and property in the U.S., increased at an annual rate of 4.2% in the January-March quarter of this year, the U.S. Commerce Department reported on April 29. That's only slightly higher than the 4.1% annual rate recorded during 2003's final calendar quarter and well below the 5% rate that many economists expected for the first quarter. The GDP price deflator, a key measure of inflation, increased to an annual rate of 2.5% in the first quarter, up sharply from the previous quarter's 1.5% and generally above economists' expectations. Separately, the U.S. Labor Department's Bureau of Labor Statistics reported on April 29 that its employment cost index increased 1.1% during the first quarter of this year, up from 0.8% during the final quarter of 2003. And the department's Employment and Training Administration reported on Thursday that initial claims for unemployment insurance fell by 18,000 last week to 338,000. "Taken together [the data] still signal above-trend GDP growth, but likely with slightly less productivity growth, slightly higher unit labor cost growth and slightly accelerating inflation," says UBS Investment Research, New York. "All these development strengthen our forecast that the Fed will tighten [the money supply] this summer, most likely in August, but possibly as soon as June." Meanwhile, David Huether, chief economist at the Washington, D.C.-based National Association of Manufacturers, believes that first-quarter GDP details bode well for U.S. manufacturers. "Business investment in equipment and software rose by a rapid 11.5% in the first quarter. This is the third consecutive quarter of double-digit growth and a major reason for the robust pace of manufacturing activity since the middle of last year," he says. "At the same time, exports grew by 3.2% in the first quarter, the third consecutive quarterly increase." "Considering the 21% surge during the prior quarter, continued growth last quarter is very encouraging," he says. "I anticipate that the manufacturing sector will benefit greatly from these recoveries throughout 2004 and actually grow faster than overall GDP for the first time in five years."