Washington: The economy in the US grew less than forecast in the first quarter as a drop in defence spending outweighed the biggest increase in consumer spending in two years.
Gross domestic product (GDP) rose at a 2.5% annual rate, lower than forecast, after a 0.4% fourth-quarter advance, commerce department figures showed on Friday in Washington. The median estimate of 86 economists surveyed by Bloomberg called for a 3% gain. Consumer spending, the biggest part of the economy, climbed by the most since the fourth quarter of 2010.
A boost to wealth from rising stock and home prices combined with a reduction in savings to help Americans cushion an increase in the payroll tax that has now begun to pinch. Recent data signal the strength in other parts of the economy may also not be sustained as across-the-board cuts in planned federal spending, together with slower stockpiling, may be restraining investment and employment.
“There are ebbs and flows but the overall picture is one of a moderately growing economy,” Joshua Shapiro, chief US economist at Maria Fiorini Ramirez Inc. (MFR) in New York, said before the report. MFR was the second-best forecaster of the economy in the past two years, according to data compiled by Bloomberg. “We’ll see a bit of tailing off this quarter.”
Stock futures remained lower after the report. Futures on the Standard and Poor’s 500 Index expiring in June declined 0.3% at 8.43am in New York.
Economists’ GDP forecasts ranged from 1 percent to 3.8 percent. The estimate is the first of three for the quarter, with the other releases scheduled for May and June when more information becomes available.
In addition to consumer spending, growth in the first quarter was driven by a rebound in stockpiling and a gain in residential construction.
Government outlays declined for the 10th time in the past 11 quarters, restraining growth. Defence spending dropped at a 11.5% annualized pace following a 22.1% plunge in the last three months of 2012. That was the biggest back-to-back decline on average since 1954, when the military demobilized during the Korean War.
Friday’s report showed household consumption, which accounts for about 70% of the economy, climbed at a 3.2% rate following a 1.8% increase from October through December, and compared with the 2.8% median forecast in the Bloomberg survey. Purchases added 2.24 percentage points to growth.
Americans boosted spending by putting less money in the bank. The saving rate dropped to 2.6% in the first quarter, the lowest since the fourth quarter of 2007, from 4.7% in the last three months of 2012.
Another reason for the slump in saving was that earnings plunged. Disposable income adjusted for inflation dropped at a 5.3% annualized rate from January through March, the biggest drop since the third quarter of 2009, after a 6.2% gain in the fourth quarter.
In addition to the increase in the payroll tax last quarter, the hit to incomes reflected companies’ accelerated dividend and bonus payments in the fourth quarter.
Corporate spending on equipment and software climbed at a 3% annualized pace. It had risen at a 11.8% rate in the previous quarter.
Inventory accumulation picked up, adding 1 percentage points to GDP growth. Stockpiles were rebuilt at a $50.3 billion annualized pace after a $13.3 billion rate.
Excluding inventories, the economy grew at a 1.5% annualized rate last quarter, down from a 1.9% gain in the fourth quarter.
Residential construction increased at a 12.6% annualized rate, adding 0.3 percentage-point to growth.
The report also showed price pressures remain contained. A measure of inflation, which is tied to consumer spending and strips out food and energy costs, climbed at a 1.2% annualized pace compared with 1% in the prior quarter.
The lagged effect from a 2 percentage-point jump in the payroll tax at the start of 2013, and $85 billion in automatic budget cuts that began on 1 March, may take a toll this quarter. The economy will grow at 1.5% pace, before re-accelerating to an average 2.4% rate of expansion in the last six months of the year, according to a separate Bloomberg survey.
The Congressional Budget Office has estimated the sequestration alone will reduce GDP this year by 0.6 percentage point.
Federal Reserve policymakers have said they will maintain stimulus until the labour market improves significantly. The economy’s inability to sustain faster growth means central bankers will probably affirm a pledge to keep buying bonds when they meet next week.
CSX Corp., the largest East Coast rail carrier, is among companies looking ahead to a better second half. Jacksonville, Florida-based CSX reported first-quarter earnings that topped analysts’ estimates.
“The key economic indicators point to slow steady growth in the US economy,” Clarence Gooden, chief commercial officer, said on an 17 April earnings call. Forward projections show continued slow growth in the near-term, with improved growth rates later in the year.
One area that has seen sustained gains is demand is automobiles. Cars sold at an average 15.3 million annualized rate in the first quarter, the most since the same period in 2008, according to figures from Ward’s Automotive Group.
“The only negative real headwinds we see are higher taxes and potentially lower government spending,” Kurt McNeil, vice-president of US sales and service at Detroit-based General Motors Co., said on a 2 April conference call. “Everything else seems to be pretty positive,” he said, mentioning jobs, housing and stock market performance.
The residential real-estate market also remains a bright spot as borrowing costs near a record low help draw buyers. Builders began work on an average 969,000 homes at an annualized rate in the first three months of the year, the most in any quarter since April through June 2008.
Business investment, another contributor to growth, is cooling as the so-called sequestration, or planned federal budget cuts, take hold. Bookings for goods meant to last at least three years slumped in March by the most in seven months, figures showed this week.
Unless demand picks up, companies may see less need for inventory accumulation, which rebounded last quarter after being a drag on growth in the final three months of 2012, economists said. BLOOMBERG
Chris Middleton contributed to this report.