April 26. 2013

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

The Commerce Department said economic growth accelerated to a 2.5 percent annual rate in the January-March quarter, missing the 3.1 percent forecast of economists polled by FactSet, a financial data provider. 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 was also helped by businesses, which responded to the greater demand by rebuilding their stockpiles. And home construction rose further.

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.

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 says.
“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.

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 Great 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 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 has also 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 Social Security tax increase. Economists expect spending to stay weak in the April-June quarter as consumers adjust to smaller paychecks.

Ben Herzon, an economist at Macroeconomics Advisers, thinks the tax increases could shave roughly 1 percentage point from growth this year. He expects the government spending cuts to reduce growth by about 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, Capital Economics noted.

Many large developing countries 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 expanded 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.

Last quarter, U.S. income growth slowed sharply after a surge in the final three months of 2012. The fourth-quarter gain had reflected a rush to pay dividends and make bonus payments before higher tax rates took effect Jan. 1. Incomes were also held back last quarter by the higher Social Security tax.

The jump in consumer spending, along with slower income growth, meant that the saving rate fell to 2.6 percent of after-tax income in the first quarter. That was down from 4.7 percent in the October-December quarter.

The first-quarter growth figures will be revised twice more based on more complete data.

9 Comments on this post.

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  • noz
    26 April 2013 at 8:51 pm - Reply

    all this economic lingo tango means nothing to a hurting,exhausted employed person, living from anorexic pay check to anorexic pay check, becoming to be the new working poor of the modern time, cannot afford to spend on the basic necessities of life.

    this economic writer of AP are parts of the tentacles of the lefty progressive liberals with his outrageous, outright lies statements, using furlough as an excuse. > THE ACROSS THE BOARD GOVERNMENT SPENDING CUTS FORCING AGENCIES TO FURLOUGH WORKERS (GOVERNMENT JOBS) REDUCING SPENDING ON PUBLIC PROJECTS MAKING BUSINESSES NERVOUS ABOUT INVESTING AND HIRING. anybody who believe this writer made up economic storyline surely were sent to the cleaners. businesses pertain to the 1%, rich, job creators, the number one public enemy of obama with mission to siphon as much as he can draw off thousands, if not millions in the form of hefty taxations for redistributions to his flock of welfare recipients. the 1% will not create jobs on economic uncertainty, without jobs means no hiring, will not invest in the USA, but will invest on tax friendly foreign countries, investing means jobs are created outside the USA. the furlough has nothing to do with private businesses, the same way with booming wall street has nothing to do with unemployment in the tank.

  • noz
    27 April 2013 at 4:37 pm - Reply

    welfare recipients make $168.00 a day, while the hard working workers make $135.00 a day, after raised taxes plus too many deductions. isn’t that despicable. this is the big time abomination of obama’s administration robbing the hard earned dollars of the american workforce, freely handing them to parasites with physique of strong body, denying mental disease, but with severe symptom of laziness, too lethargic like the living dead.

  • noz
    27 April 2013 at 5:17 pm - Reply

    obama continue to argue, he is the living president fighting for the middle class. the rhetoric of obama as the front fighter of the middle class always resonates on his speeches. yes its all obama’s BS talk, the truth is obama have degraded the middle class living, becoming bad to worst, living from pay check to pay check. regrettably, the middle class believed obama is doing a good job by reelecting obama.

    • Delia
      1 May 2013 at 6:59 am - Reply

      The United States of America has been brought down to their knees since this idiot president took office in 2009. He with help of his administration, the demons crap party, the liberal media and other evil individual in America has destroyed our once great nation.

      Homosexuality, perversion, welfare illegals everywhere, Marxist governments! in control,baby killers posing as doctors. Pro gay , Pro same sex marriage, Pro Abortion, Pro Illegals , list is long and its sick sick sick .

      • av
        1 May 2013 at 7:58 am - Reply

        @delia – like what you said sick, sick, sick. I think you are sick kasi daeng ka ng daeng. Ano ba masakit, ung bulsa ksi ung mga benepisyo mo ay nabawasan?

        • Delia
          1 May 2013 at 2:06 pm - Reply

          What the hell is your problem Av, it was not me whos affected with this sick econmy , its the next generation i am worried about , I have no problem but you do Av , you have not came up with any good solution . Oh ! wait you have no brain and all you can think of is your self and nothing else. For me , i have live the life i always wanted , and achieve so much more than i can possibly hope . My children and their children will supper the most with what is the administration doing now to their future.

          I dont want them working their ass of harder just to pay all this debt Obama accumulated in short years , I know you do not give a hoot AV, cause when tides turn around you can always leave like you left Philippines when theres no benificial for yourself here anymore.

          If i have a complain to make Av , it will be about you foreigners coming here taking american jobs then have a nerves to be mayabang when they get a little money. Also , Asians regularly bring older parents to the US and dump them on Medicaid, Medicare and SSI. Which i am sad to say i am paying for all that true my taxes. When they recieve SSI they brag saying oh look ! i got pension just for coming here.

          My kids are not even eligible for College loan , and foreigners taking all the resource and drainning our institutions .. So why is that Av ? and you think everything is OK while you foriegners rubbing our childrens their future ?

          legal and illegal – will lead to our country’s demise, it shows how foriegners is overwhelmingly going to destroy us. And the quality of immigrants overall is NOT beneficial to our nation. I said “overall ” if you can cite an example of a “great” immigrant, that doesn’t disprove my statement, it only provides an exception to the rule. There are exceptions to the rule, but overall, most immigrants are a drain on us.

          • av
            2 May 2013 at 8:42 am -

            @delia – It’s because your race and so called americans that shooed away the natives in this country. It’s also because your damn fellow white men would not take jobs that any other race would take, then you have the guts to tell me that I am bloodsucking immigrant into your own f**n country? Everything and anything that I own here and abroad were made from my own sweat and blood in a cleanest way you would imagine. You self-centered Americans cannot even take care of your own elderly parents and citizens. Then you go tell me that we are draining your medicare system? If I were to you I would put a KKK president on this damn stupid government so that racists people like you could blow up all immigrants and eat your crap that is made in china…

          • av
            2 May 2013 at 8:46 am -

            @delia – why is your kids not eligible to receive student loans? It’s because of your own fault, probably have defaulted on their prior loans. No mistake I did the same thing defaulted my loans and could not get anymore until I went back to school and made payments to my loan so that I could have it consolidated. It’s the simple stupid mistakes Delia that most americans make that’s what gets you and the rest of our pack into trouble….

          • av
            2 May 2013 at 8:50 am -

            The next generation? Who knows about what’s the next generation would be, but this country is a well-developed country and it’s people which by the way is becoming the minority now and the migrants are fueling this country’s economy. Not enough smart asses in this country to do the job so you folks hires people from Bangladesh, India and China to do the jobs. It’s your stupid government’s fault that they missed out on providing better education and training to their own citizens to qualify for these jobs.