Tags: GDP | Growth | economy | us

Growth Slows to 2.2% as Businesses, Government Cut Spending

Friday, 27 Apr 2012 08:32 AM

 

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The U.S. economy grew more slowly in the first three months of this year. Governments spent less, and businesses cut back on investment. But consumers spent at the fastest pace in more than a year.

The result suggests that the economy will continue to expand, slowly but steadily.

The Commerce Department estimated Friday that the economy grew at an annual rate of 2.2 percent in the January-March quarter, compared with a 3 percent gain in the final quarter of 2011. But growth is expected to rebound to around 3 percent for all of 2012 as stronger job growth spurs more consumer spending.

Editor's Note: Obama’s Economic ‘Fix’ is In . . .

Consumer spending accelerated to an annual rate of 2.9 percent in the first quarter. The strength came from a second robust quarter of growth in auto purchases. Consumer spending is closely watched since it accounts for 70 percent of economic activity.

Government spending fell at an annual rate of 3 percent in the first quarter. The biggest factor was a sharp drop in defense spending. All levels of government are under pressure as they struggle to control budget deficits.

Chris Williamson, chief economist with the research firm Markit in London, pointed to a 2.1 percent annualized drop in business investment as a "big disappointment."

He said the decline "serves as a reminder that business remains wary of expansion, given the uncertain economic outlook."

And investment in equipment and software rose at just a 1.7 percent annual rate. That was the slowest pace since the Great Recession ended in mid-2009.

Businesses also restocked their shelves more slowly in the January-March quarter than in the October-December period. That, too, slowed growth.

Beth Ann Bovino, senior economist at Standard & Poor's, says businesses might have cut back their spending when an investment tax break expired at the end of 2011.

Some economists said they expect business investment to strengthen in coming quarters and help support stronger overall growth.

"The U.S. economic expansion continues at a modest to moderate rate, with little momentum but should pick up somewhat later this year as business investment gets back on track," said Sal Guatieri, chief U.S. economist at BMO Capital Markets

The 2.2 percent overall increase in the economy in the first quarter marked the 11th consecutive quarter that the gross domestic product has expanded since the deep 2007-2009 recession ended in June 2009. But the gains have been far below the usual increases coming out of a deep recession.

GDP is the nation's total output of goods and services, from cars and refrigerators to electricity to manicures.

A growth rate of 2.5 percent or higher is considered good when the economy is healthy. But with 12.7 million people unemployed, faster growth is needed to boost hiring. Under one rule of thumb, the economy must grow roughly 4 percent for a full year to lower the unemployment rate, now 8.2 percent, by 1 percentage point.

Trade was a slight drag on growth in the first three months of the year. U.S. manufacturers are finding it harder to sell products overseas because of Europe's debt crisis and weaker growth in Asia.

The government makes three estimates of the GDP for each quarter. Friday's was the first for the January-March quarter. Each revision is based on more complete economic data.

Many economists predict growth will strengthen in the second half of this year because they think hiring will continue to improve. Job growth has helped drive the unemployment rate to 8.2 percent in March from 9.1 percent in August and given households more money to spend.

Joel Naroff, chief economist at Naroff Economic Advisors, thinks the economy will grow 3 percent for all of 2012. That would be nearly double the anemic 1.7 percent growth in 2011. The economy expanded 3 percent in 2010, the first full year of the recovery after the Great Recession officially ended in June 2009. In 2009, economic output had shrunk 3.5 percent.

Last year began with signs of healthier growth. But then the economy endured a series of shocks. Gasoline prices surged after political unrest triggered by the Arab Spring. The earthquake and tsunami in Japan slowed the flow of supplies to U.S. auto plants and other factories. And the European debt crisis and a standoff over raising the federal borrowing limit unsettled investors.

Gasoline prices have risen again this year. But the effect on consumer spending so far has been less. In part, that's because a warm winter meant families didn't have to spend as much to heat their homes.

Also, consumers this year have reduced their debt loads. Housing is inching back. State and local governments aren't cutting as much. Banks are lending more. And the threat from Europe's debt crisis has eased somewhat.

Editor's Note: Obama’s Economic ‘Fix’ is In . . .



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