Economy slows from January
WASHINGTON – The U.S. economy grew at a sluggish 1.8 percent annual rate from January through March, the government said Thursday, in a report that showed a sharp slowdown and an economy that continues to struggle.
Taken along with other indicators, the new numbers point to an economy unable to maintain serious upward momentum. The slowdown marked a sharp deceleration from 3.1 percent growth in the final three months of 2010.
Over the past four quarters, the U.S. economy has grown at an average rate of 2.3 percent, not enough to significantly bring down the still-high unemployment rate, which last month stood at 8.8 percent. In the past three weeks, initial claims for unemployment have risen, prompting renewed concern about the sick economy.
“While the continued expansion is encouraging, clearly, faster growth is needed to replace the jobs lost in the downturn,” said Austan Goolsbee, head of the White House Council of Economic Advisers.
Warning signs peppered Thursday’s data on the slowly expanding gross domestic product, the broadest statistical measure of the economy, from the Bureau of Economic Analysis. Most troubling was the sharp slowdown in business fixed investment. It rose by 1.8 percent in the quarter, but that rate of growth is down sharply from the robust 7.7 percent growth rate during the final three months of 2010.
Still, Goolsbee saw Thursday’s numbers as a glass half-full.
“Some key components of GDP continued to expand in the first quarter. Consumer spending rose 2.7 percent at an annual rate, boosted by a 2.9 percent increase in real disposable income that was due in part to the cut in payroll taxes. Equipment and software investment increased 11.6 percent,” he said in a statement.
Business spending on equipment rose sharply in the quarter, driven in part by tax incentives in December’s tax deal that renewed accelerated tax write-offs for business equipment.
Residential investment fell 4.1 percent in the first quarter after rising 3.3 percent in the final three months of 2010. Government’s contribution to the economy fell by 5.2 percent from January through March, after falling 1.7 percent in the final three months of 2010. Trade also dragged down growth, as U.S. exports slowed and imports rose.
On Wednesday, Federal Reserve Chairman Ben Bernanke said he expected a weak first-quarter number because of rising oil prices, Japan’s devastating earthquake and tsunami, and unrest in the Mideast and Northern Africa. Bad winter weather is also blamed.
The Fed revised down its January forecast for economic growth, lowering the range to between 3.1 percent and 3.3 percent from earlier projections of 3.4 percent to 3.9 percent. A “moderate pace” of growth was the best the Fed would project for the rest of the year.
“Household spending and investment in equipment and software continue to expand, supporting the recovery. But non-residential investment is still weak, and the housing sector is depressed,” Bernanke said. “In the labor market, overall conditions continue to improve gradually.”
The reduced projection for growth through the rest of this year, he said, “reflects the somewhat slower-than-anticipated pace of growth in the first quarter.”
The Fed’s long-run forecasts for employment suggest that the jobless rate won’t dip below 7 percent until late 2013.
“The projected decline in the unemployment rate is relatively slow, largely because economic growth is projected to be only modestly above the trend growth rate of the economy,” Bernanke said.
Josh Bivens, an economist with the liberal Economic Policy Institute, said Thursday’s report was grim and points to a need to stimulate growth.
“The last six months have seen an average growth rate of just over 2.4 percent, a rate indicating that the economy’s growth isn’t strong enough to put any downward pressure on the overall unemployment rate. In short, unless the economy starts growing appreciably faster, the problem of high unemployment will be quite persistent,” Bivens said in analysis.
Most mainstream economists continue to forecast a growth rate between 2.5 percent and 3.5 percent for this year as a whole, assuming that oil prices don’t spike much higher.
Rising oil and gasoline prices are sucking purchasing power away from consumers and feeding into the rising price of groceries.
Complicating matters, Congress is now in a fight over how and when to bring down budget deficits. Many economists fear that a move to sharply cut spending in the next 18 months could hamstring the already-weak recovery. Thursday’s numbers reminded just how weak the economy remains. Federal spending fell 7.9 percent in the first quarter of 2011, the sharpest quarterly drop in more than a decade.