Economic growth continued last quarter but pace slows

04/28/2012 12:00 AM

04/27/2012 10:06 PM

The economic output of the United States grew at an annual rate of 2.2 percent in the first quarter of 2012, largely on the strength of consumer spending and a surge in residential building helped by unseasonably warm weather.

The pace of growth slowed from the prior quarter's rate of 3 percent but maintained what many economists have started to refer to as a "sustainable" recovery speed.

But as with so much economic data lately, there was plenty of forage in the gross domestic product report for both the sanguine and the skeptical. Business investment, which had been a bright spot in the previous quarter, declined, and some economists warned that consumer spending could not continue without more hiring and wage growth.

"There are mixed messages in this report," said Dean Maki, the chief U.S. economist at Barclays. "None of this is going to change fundamental views on the economy."

The United States may be lumbering, but it has not followed the eurozone, where growth halted in the fourth quarter and where the first quarter is expected to show a contraction. Britain said this week that it is already in a double-dip recession.

But even a growth rate of 2.2 percent is too slow to make up for lost ground.

"I don't think the issue is whether or not the growth rate is sustainable," said Steven Blitz, chief economist of ITG Investment Research. "I think the question is whether the growth rate that's sustainable is acceptable – politically and socially acceptable."

The U.S. economy has been growing since the second half of 2009, and the recovery accelerated throughout 2011. Economists had initially predicted a much weaker showing this quarter, with growth accelerating a bit in the second half. But in the past few weeks, many revised their numbers upward as several economic indicators came in better than expected.

Then, some of the numbers seemed to soften. Shipments of durable goods increased last month, but new orders showed their steepest drop since January 2009. The trade balance improved, but job growth weakened and, more recently, new claims for unemployment benefits have risen.

Some analysts shrug off the oscillation as normal, pointing out that economies do not move in a straight line. Others see momentum breaking down.

"The GDP report was disappointing," economists at Morgan Stanley wrote. "The mix of activity pointed to slower growth ahead."

Falling government spending, including a large drop in defense spending, also continued to weigh down the recovery, subtracting more than half a percentage point from growth.

Growth has not accelerated enough to make much of a difference in the Federal Reserve's outlook. This week, Fed officials revised their growth projections up slightly, predicting 2.4 percent to 2.9 percent growth for the year, up from 2.2 percent to 2.7 percent. The Fed chairman, Ben Bernanke, also said the Fed would stick to its current plans to keep interest rates low until late 2014.

In the long term, the Fed said it expected unemployment to fall very slowly, remaining as high as 6.7 percent by the end of 2014.

Another question is how much the growth rate can increase with so many external threats, like a global slowdown, potentially worsening crisis in Europe and tensions around Iran.

On Thursday, Standard & Poor's downgraded Spain's credit rating by two notches, underscoring fears that the country would require a bailout.


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