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Growth slowed at year's start but some see rebound - DailyFinance


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By PAUL WISEMAN and CHRISTOPHER S. RUGABERAP posted: 6:05 PM 04/27/12

WASHINGTON -Don't panic yet. The government reported Friday that the economy got off to a tepid start this year, but that doesn't foreshadow a repeat of the near-standstill that happened in 2011.

"The economy is firmly on a growth trajectory," said Sung Won Sohn, an economics professor at California State University's Smith School of Business. "The first-quarter slowdown will be temporary."

Still, the January-March report was discouraging.

Economists had expected gross domestic product — the broadest gauge of economic output — to expand at a 2.5 percent annual rate for the first three months of the year. Instead, the Commerce Department said it was 2.2 percent, mainly because of government budget-cutting and a slowdown in business investment.

And some of the January-March growth, meager as it was, probably came at the expense of the current quarter. An unseasonably warm winter pulled car buyers into showrooms earlier than usual.

The same was true for housing construction. That's one reason it jumped at a 19 percent pace from January through March.

Economists doubt consumers can keep spending as freely as they did in the first three months of this year: an annual pace that was 2.9 percent faster than in the previous quarter and the fastest in more than a year. They probably can't afford to. Americans' after-tax income rose just 0.6 percent in the first three months compared with a year earlier. That was the puniest pay increase in two years.

People spent more in part because they socked away less. The savings rate fell to 3.9 percent of after-tax income. That was down from 4.5 percent. Economists worry that people won't keep spending more unless their income grows.

Stock prices rose Friday despite the report of weaker growth. David Rosenberg, chief economist at Gluskin Sheff, said investors might have bid up stocks because they think the Federal Reserve is more likely to pursue another round of bond buying to stimulate the economy.

Fed Chairman Ben Bernanke "has created the impression that if the economy stumbles, he'll be there to hold your hand," Rosenberg said.

The lackluster first-quarter growth follows government reports that hiring slowed sharply in March and the number of people seeking unemployment benefits reached a three-month high.

With 12.7 million people unemployed, today's economy needs much faster growth to boost hiring. Growth would have to be roughly 4 percent for a full year to lower the unemployment rate, now 8.2 percent, by 1 percentage point.

In 2011, a series of setbacks struck the economy. Gas prices rose sharply. An earthquake in Japan shuttered factories there and cut off supplies to U.S. manufacturers. A standoff in Washington brought the federal government to the brink of default, rattling investors and consumer confidence. And Europe's debt crisis threatened to diminish U.S. exports and further spook investors.

The economy slowed to an annual rate of just 0.4 percent in the first quarter of 2011. Unemployment, which had been falling, rose again last summer.

But most economists think the U.S. economy is more resilient this year.

The job market, household finances and businesses are all in better shape than they were a year ago. Supplies are flowing freely. Political bickering has eased. And the fears about Europe have subsided at least temporarily.

"People are less concerned that the eurozone crisis could engulf the whole world," says Nigel Gault, an economist with IHS Global Insight.

A 55-cent run-up in gasoline prices (to an average $3.83 a gallon) isn't hurting as much this year. In part, that's because drivers are getting used to paying more. And families' finances are sturdier after another year of paying down debts.

In addition, some factors that held back growth in the first quarter aren't expected to last. Businesses splurged on software and equipment at the end of 2011 because of an expiring tax break. That stole economic activity, in effect, from the first quarter. Companies will probably resume spending again later this year.

And economists say government spending will probably rebound — or at least stop falling — because state and local governments are collecting more tax revenue as their economies slowly recover.

"Their budget holes are getting a lot smaller," says Jay Bryson, global economist for Wells Fargo.

Most of all, the job market is stronger than it was last year. Unemployment has fallen from 9.1 percent in August to 8.2 percent in March. The economy has added nearly 1.9 million jobs over the past year. More hiring is creating more pay and more spending — a cycle in which hiring and consumer spending reinforce each other and grow.

Economists note that Friday's report isn't the final word on first-quarter growth. It is just an initial estimate. The government will revise the figures in May and again in June.

Then in July, the growth figures will be tweaked yet again. That's when the government will revise its estimates of growth from 2009 through the first quarter of this year.

The picture could look brighter after the revisions. Two months ago, the government revised income and savings for the second half of last year. It showed Americans had earned and saved more than previously thought. That meant they had more money to spend.

Some economists expect a similar revision this year because job gains suggest that incomes might be higher.

This was the 11th quarter since the Great Recession officially ended in June 2009. The fastest rate of economic growth has been 3.9 percent in the first quarter of 2010. Normally, a much bigger bounce would follow a deep recession like the one the United States sank into in December 2007.

When the economy emerged from the recession of 1981-1982, for instance, growth hit an 8 percent annual pace for four straight quarters in 1983 and 1984.

The gross domestic product measures the output of all goods and services produced in the United States, from cars to electricity to manicures. GDP growth drives job creation, pay, corporate profits and stock prices.

As disappointing as the first-quarter numbers were, the U.S. economy still looks a lot stronger than most of the rest of the developed world. It's expected to grow perhaps 2.5 percent for the full year.

By contrast, Britain's economy will only grow 0.8 percent and Japan's about 2 percent, according to forecasts from the International Monetary Fund. Things are even worse in Europe. The 17 countries that use the euro as their currency are expected to see growth shrink 0.3 percent.

"Growth is an increasingly rare commodity in the global economy," says Jason Conibear of Cambridge Mercantile, which specializes in trading currencies. "But the US has got it."—

AP Economics Writer Martin Crutsinger contributed to this report.

Copyright 2012 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

2012-04-27 18:05:14

AP

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