Growth at 2.5% despite tax rise

Spending drives quarter’s upturn

WASHINGTON - Americans shrugged off higher taxes to lift the U.S. economy at the start of the year. Government spending fell, though, and the effect of the tax increases along with federal budget cuts could slow growth later this year, economists said.

Economic growth accelerated to a 2.5 percent annual rate in the January-March quarter, the Commerce Department said Friday. That was up from an anemic 0.4 percent annual growth rate in the October-December quarter.

Consumer spending surged at an annual rate of 3.2 percent - its biggest jump since the end of 2010. Growth also was helped by businesses, which responded to the greater demand by rebuilding their stockpiles. And home construction rose further.

“We saw some good resilience from the consumer, particularly given all the head winds,” said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York. “The weakness in government spending is an issue. It’s going to be tough to repeat the first-quarter performance this quarter.”

Government spending sank at a 4.1 percent annual rate, led by another deep cut in defense spending. The decline kept last quarter’s increase in economic growth below expectations of a 3 percent rate or more.

Many economists say they think growth as measured by the gross domestic product is slowing in the April-June quarter to an annual rate of just 2 percent. Most foresee growth remaining around that subpar level for the rest of the year. The first-quarter growth figures also will be revised twice more based on more complete data.

Sal Guatieri, senior economist at BMO Capital Markets, predicts an annual growth rate of 2 percent for the April-June quarter and a 3 percent rate in the second half of the year.

“The second-half acceleration will be supported by improved household finances, pent-up demand for autos and the on-going recovery in housing,” Guatieri said. “We are seeing significant housing-related consumer purchases in such areas as furniture.”

GDP is the broadest gauge of the economy’s health. It measures the total output of goods and services produced in the United States, from haircuts and hamburgers to airplanes and automobiles.

“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 Moody’s Analytics.

In a healthy economy, with an unemployment rate between 5 percent and 6 percent, GDP growth of 2.5 percent or 3 percent would be considered solid. But today’s still-struggling economy, with unemployment at 7.6 percent, needs faster growth to generate enough jobs to quickly shrink unemployment.

Since the recession officially ended in June 2009, growth has remained weaker than usual after a severe downturn. In part, that’s because the recession followed the worst financial crisis since the Great Depression. The economy expanded just 2.4 percent in 2010, 1.8 percent in 2011 and 2.2 percent in 2012.

This had been expected to be the year when growth would finally reach a more robust 3 percent to 4 percent pace. But across-the-board government spending cuts, which began taking effect March 1, have made that unlikely. The cuts are forcing agencies to furlough workers, reducing spending on public projects and making businesses nervous about investing and hiring.

Unless Congress and the White House reach a deal to reverse them, the government spending cuts will continue through the end of the year and beyond.

Consumers’ take-home pay also has fallen because President Barack Obama and Congress allowed a Social Security tax cut to expire. A person earning $50,000 a year has about $1,000 less to spend this year. A household with two high-paid workers has up to $4,500 less. Consumers’ take-home pay is crucial to the economy because their spending drives roughly 70 percent of growth.

Americans appeared to shake off the tax increase at the start of the year. They spent more in January and February, powered by a stronger job market.

But hiring slowed sharply in March. And consumers spent less at retail businesses, a sign that many were starting to feel the effects of the end of the Social Security tax cut. Economists expect spending to stay weak in the April-June quarter as consumers adjust to smaller paychecks.

Ben Herzon, an economist at Macroeconomics Advisers, said the tax increases could shave roughly 1 percentage point from growth this year. He expects the government spending cuts to reduce growth by a further 0.6 percentage point.

The drop in government spending cut growth in the January-March quarter by 0.8 percentage point. Three-fourths of that decline came from defense spending.

Already over the past two quarters, the decline in government spending has marked the sharpest six-month contraction since the Korean War ended in 1953.

Some countries, such as China, are growing much faster than the United States. China’s economy expanded 7.7 percent in the first three months of the year compared with a year earlier - and that was a slowdown from its previous double-digit growth. Indonesia’s economy grew 6.2 percent in 2012, India’s 4.1 percent.

But among developed countries, the United States is still performing relatively well. Most of Europe is stuck in a second year of recession. Germany’s economy grew just 0.7 percent in 2012. France’s didn’t grow at all. Italy’s shrank 2.4 percent.

And in the January-March quarter, Britain grew at an annual rate of just 1.2 percent rate, less than half the estimated U.S. pace.

Information for this article was contributed by Martin Crutsinger and Christopher S. Rugaber of The Associated Press; by Shobhana Chandra of Bloomberg News; and by Kevin G. Hall of McClatchy Newspapers.

Business, Pages 27 on 04/27/2013

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