Economic activity picked up in the first quarter of this year, with output expanding at an annualized pace of 2.5 percent, according to a Commerce Department report released on Friday. The number was a welcome improvement from the unusually sluggish growth at the end of 2012, but significant government spending cuts and the pinch from recent tax increases look likely to keep the economy in stall speed in the months ahead.
“We just have not been able to hit escape velocity, to get us growing fast enough to make up for the ground we lost during the recession,” said Steve Blitz, director and chief economist at ITG Investment Research. He forecasts growth around 2 to 2.5 percent for the rest of the year, which is slower than the economy’s long-term average. “Government spending is clearly a negative, but the reason why it’s such a strong negative is because there’s nothing else in the private sector really driving things forward.”
Economists noted that even the decent growth in the first quarter was probably somewhat overstated, with some of the improvement caused mostly by a rebound from the bare 0.4 annual growth rate in the fourth quarter of 2012. Businesses drew down their back-room inventories at the end of last year, so they needed to replenish them at the start of 2013. But that stockroom rebalancing appears to have restored inventories to acceptable levels and probably will not drive much more business spending growth later in the year.
Similarly, consumer spending was stronger in the first quarter, growing at its fastest pace since late 2010. But Mr. Blitz discounted even that apparently good news because so much of the extra spending was in housing and utility costs, which could have been driven by unusually cold weather.
It also seems unlikely that consumers will spend as freely in the months ahead, economists said. Consumer sentiment and retailer reports suggest that households are starting to feel squeezed from the lapse of the two-year payroll tax holiday. That meant the Social Security tax rate rose 2 percentage points in January, adding about $700 a year to the typical worker’s tax bill.
Wage stagnation may also put a crimp in spending. Much of the job growth, after all, has been concentrated in relatively low-paying areas like food services and retail, and household incomes have been more or less flat since May, according to Sentier Research.
On the bright side, gas prices have fallen sharply in the last two months, which means households have more money free for other kinds of purchases.
The most immediate concern for many businesses and consumers is the shrinking government.
In the first quarter of this year, government spending fell at an annual rate of 8.4 percent, after a decrease of 14.8 percent in the fourth quarter of 2012 — with the cuts driven by sharp declines in military spending. Both declines happened largely before the bulk of Congress’s across-the-board spending cuts took place. The so-called sequester is scheduled to strip $85 billion out of federal spending before Oct. 1, cuts that will have secondary effects throughout the private sector. Furloughed federal workers, for example, will spend less money at local businesses.
While lower government borrowing and spending can help free resources for business when the economy is operating closer to its capacity, that is not the case today. What may moderate the drag from federal spending cuts is the prospect that state and local governments may stop cutting and start spending more now that their tax revenue has risen in the last year, said Paul Dales, senior United States economist at Capital Economics.
Still, more federal cuts will probably overwhelm whatever may happen at the state and local levels.
“With fiscal tightening weighing on the spring and summer quarters, we expect weaker growth ahead,” Ian Shepherdson, chief economist at Pantheon Macroeconomic Advisers, said in a note to clients. “We have seen good quarters before, but what counts is sustainability, and on that score we are deeply unconvinced.”
The pace of economic activity may have already begun to slow, given recent disappointing reports about economic indicators in March. Hiring slowed sharply last month, for example, and orders for durable goods like aircraft and metals fell more than analysts had expected. Some economists are keeping their fingers crossed that unusually cold weather was responsible for these dismal numbers, which would mean the slowdown was temporary.
Article source: http://www.nytimes.com/2013/04/27/business/economy/us-economy-grew-at-2-5-rate-in-first-quarter.html?partner=rss&emc=rss