Economy grew at 2.5% rate in first quarter

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Courtesy of USA Today


The nation’s economy perked up in the first quarter, expanding at a 2.5% annual pace, the government said Friday, but that was less than expected.

The pickup was fueled by stronger consumer spending and increased business stockpiling that was partly offset by a drop in government spending.

Growth is expected to slow in coming months as the impact of federal budget cuts ripple through the economy.

Economists’ consensus forecast was for 3% annualized growth in gross domestic product in the first quarter. The economy grew at an anemic 0.4% pace in the final quarter last year.

Consumer spending increased at a 3.2% annual rate in the first quarter, the fastest pace in two years, as Americans saved less.

Business investment also picked up, but at a slower pace than in the fourth quarter. But business stockpiling of products increased at a 1% rate after falling in the fourth quarter.

Government spending, meanwhile, fell 4.1%, largely because of an 8.4% decline in federal outlays. The drop, though, was smaller than in the fourth quarter.

The disappointing report will likely push back estimates for when the Federal Reserve will scale back its bond-buying, says Chris Williamson, chief economist of Markit, a financial information services company. The bond purchases are aimed at holding down interest rates and stimulating the economy.

The first-quarter showing was partly buoyed by a recovering housing market, brisk economic activity and job growth early in the period. Industrial output increased at a 5% annual rate in the quarter.

But recent disappointing reports have signaled an economy that appears to be slumping for a fourth straight spring. In March, employers added just 88,000 jobs vs. an average 208,000 the previous two months.

Manufacturing and service sector activity expanded at a slower pace last month. And retail sales and orders for durable goods such as airplanes and appliances fell unexpectedly.

Stuart Hoffman, chief economist of the PNC Financial Services Group, is among many economists who expect a mid-year slowdown as policies in Washington partly offset a strengthening private sector.

The New Year’s Day decision by the White House and Congress not to renew a payroll tax cut is leaving less money in consumer’ pockets. And $85 billion in across-the-board federal spending cuts is dampening growth, particularly in the defense industry.

Together, the two developments are expected to shave more than a percentage point off economic growth this year, leaving the economy expanding at about the same 2% annual pace that has characterized most of the nearly four-year-old recovery.

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