WASHINGTON — The U.S. economys 2.5 percent annual growth rate from January to March, which the government reported Friday, reflected surprisingly strong consumer spending that was weighed down by continued declines in government spending, especially on defense.
After a dismal growth rate of just 0.4 percent in the final three months of 2012, which were marked by political strife and uncertainty over the tax code, mainstream economists had expected first-quarter gross domestic product to grow at a rate of 3 percent or higher. That didnt happen.
GDP growth in the first quarter was on the soft side, largely due to big cuts in government spending. Fiscal austerity is in full swing and will intensify this spring and summer, said Mark Zandi, the chief economist for forecaster Moodys Analytics.
In effect, the good news from strong consumption and businesses replenishing their shelves was offset by the weight of declining government spending through the automatic budget cuts known as sequestration.
This weight is getting heavier, and thus growth will be uncomfortably weak in coming months, Zandi said. Odds are the recovery will be able to navigate through the fiscal head winds, and on the other side next year the economy will grow much more strongly. Before the sunlight, theres likely to be rain for much of this year. The first-quarter report from the U.S. Commerce Department spans only a single month of the budget cuts, which began in March.
Economists think that the current quarter, which ends June 30, will show greater effects from the sequester.
Inventory, a term for how businesses replenish their stock, contributed to growth from January to March, after dragging against growth in late 2012. Economists expect it to hurt growth again as consumers grow more cautious amid soft hiring and growth numbers.
Government spending fell by another 4.1 percent from January to March, on top of a very sharp decline of 7 percent the previous quarter.
In the last two quarters, measured real GDP growth has been held back by double-digit annualized quarterly declines in defense spending, which have portrayed a weaker picture of the economy than the monthly data on private sector activity have painted, wrote economists at forecaster RDQ Economics in New York.
The Bureau of Economic Analysis, part of the Commerce Department, reported Friday that spending on national defense had declined at an annual rate of 11.5 percent in the first quarter, on top of a decline at a rate of 22.1 percent in fourth-quarter 2012.
One puzzling data point in Fridays report was the strong numbers for personal consumption spending, which grew at a blistering annual rate of 3.2 percent, compared with 1.8 percent in the final three months of 2012, and far exceeded analysts expectations. It meant that for at least a three-month period, consumers shrugged off the reversion of payroll tax rates to their previous levels, taking more money out of consumers wallets.
The consumer spending numbers will be watched closely in the months ahead, in part because the sequester and associated furloughs of government employees are expected to weigh on consumption.
The White House cautioned Friday that the cuts in government spending are likely to show up more clearly in coming reports on economic growth.
These arbitrary and unnecessary cuts to government services will be a head wind in the months to come, and will cut key investments in the nations future competitiveness, Alan Krueger, the head of the White House Council of Economic Advisers, said in his blog. The Congressional Budget Office has estimated that the sequester will reduce GDP growth by 0.6 percentage point for the year.
When government spending is taken out of the measure of GDP, the economy grew at an annual rate of 4 percent, economists at RDQ Economics noted, adding that government spending has fallen by a rate of 5.6 percent over the past half year while the economy has grown at a rate of just 1.4 percent the past two quarters.
The U.S. economy has grown for 15 straight quarters, but the annual growth rate accompanying that expansion is about 2 percent, about most economists expect for 2013.
At that rate, the unemployment rate is likely to remain high and the Federal Reserve is likely to continue its controversial bond-buying programs in order to keep interest rates at historically low levels.
If lending rates remain low, consumers can continue purchasing cars for unusually low financing costs and homebuyers who qualify for mortgages under tighter lending standards can enjoy historically low borrowing costs.
Despite a recession in much of Europe and slower growth in China and other developing nations, U.S. exports increased at a rate of 2.8 percent from January through March, compared with a decrease of 2.8 percent in the final three months of last year. However, imports from abroad outpaced that number, growing at a rate of 5.4 percent for the quarter and subtracting from growth for trade. Because imports exceeded exports, international trade subtracted from the sum of U.S. economic growth.
Fridays GDP report was a first estimate, based on incomplete data. Revisions to the first-blush number will be announced May 30, and then therell be another further revision.
Correction: An earlier version of this story misspelled the last name of Alan Krueger, the head of the White House Council of Economic Advisers. It also made a typographical error when comparing personal consumption spending for the first quarter of 2013 with the last quarter of 2012 (not the last quarter of 2013).