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Economic growth, at 2.5%, falls below expectations

April 26, 2013|By Don Lee
  • Debbie Steinmetz stacks hats at the Bollman Hat Co. in Adamstown, Pa. A jump in business inventories lifted economic growth.
Debbie Steinmetz stacks hats at the Bollman Hat Co. in Adamstown, Pa. A jump… (Andrew Harrer / Bloomberg )

WASHINGTON -- The pace of economic growth picked up in the first quarter, but not nearly as fast as many analysts had forecast -- an unwelcome sign given other recent indicators that the recovery is losing some steam and further government spending cuts loom.

The nation's economic output expanded at an annual rate of 2.5% in the quarter, the Commerce Department said Friday. That was up from 0.4% growth in the final three months of last year as defense spending fell sharply and companies stockpiled less inventory.

As expected, business inventories rebounded at the start of this year. And the cuts in federal defense were smaller. Plus there was an acceleration in consumer spending. All of these helped lift growth in gross domestic product to a more normal rate as the 4-year-old recovery has averaged growth of about 2% annually.

But after the unusually weak performance at the end of last year, many analysts had forecast GDP to bounce up by 3% or more in the first quarter. But business investment slowed, and weaker trade also held back growth.

Before Friday's report, analysts were forecasting GDP growth of about 1.2% in the current second quarter. Recent signs of slowing have emerged in the employment market as well as business investments.

On the bright side, the housing market recovery continues to boost the economy; residential investment jumped 12.6% over the quarter. And some analysts noted that the consumption growth of 3.2% in the first quarter, up from 1.8% in the prior quarter, was impressive in light of the expiration of the payroll tax holiday this year and the continued fiscal squeeze, particularly in defense expenditures.

However, to keep up their spending, consumers had to reach into their savings. The saving rate in the first quarter fell sharply to 2.6%, from 4.7%. And the outlook for spending in the near term has been dimmed by indications of weaker hiring and the continued pinch from higher taxes taken out of paychecks, although the recent fall in gas prices will help consumers.

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