US first quarter economic growth slower than expected

Friday 26 April 2013 16.37
US economy grew at a rate of 2.5% in first three months of 2013
US economy grew at a rate of 2.5% in first three months of 2013

US economic growth regained speed in the first quarter, but not as much as expected.

This could heighten fears the already weakening economy may struggle to handle deep government spending cuts and higher taxes.

Gross domestic product expanded at 2.5% annual rate, the US Commerce Department said today, after growth nearly stalled at 0.4% in the fourth quarter.

The increase, however, missed economists' expectations for a 3% growth pace.

Part of the acceleration in activity reflected farmers' filling up barns after a drought last summer decimated crop output. Removing inventories, the growth rate was a tepid 1.5%.

Today's data showed contributions to growth from all areas of the economy, with the exception of government, trade and investment by businesses in offices and other commercial buildings.

Consumer spending, which accounts for more than two-thirds of US economic activity, increased at a 3.2% pace - the fastest since the fourth quarter of 2010. It grew at a 1.8% rate in the fourth quarter of last year.

However, households cut back on saving to fund their purchases after incomes dropped at a 5.3% rate in the first quarter - a bad sign for future spending growth. The drop in income was the largest since the third quarter of 2009.

The saving rate - the percentage of disposable income households are socking away - fell to 2.6%, the lowest since the fourth quarter of 2007, from 4.7% in the fourth quarter of 2012.

Much of the gains in first-quarter spending came from car purchases and outlays for utilities, which were boosted by unusually cold temperatures. Consumers managed to step up their spending despite the return of a 2% payroll tax and higher petrol prices.

Despite the spike in petrol prices, inflation pressures were benign in the first three months of the year.

An inflation gauge in the government's GDP report rose at a 0.9% rate, the smallest increase since the second quarter of 2012. The personal consumption expenditure index had increased at a 1.6% pace the fourth quarter.

A core measure that strips out food and energy costs rose at a 1.2% rate, still well below the Fed's 2% target.

The lack of inflation should come as welcome relief for US households, but it could cause some nervousness at the US Federal Reserve, which may see it as a symptom of the economy's weakness.

Another big contributor to growth in the fourth quarter was inventory accumulation, which added a full percentage point to GDP growth after chopping off 1.5 points from output in the final three months of last year.

Business spending on equipment and software slowed sharply, growing at an only 3% rate after a brisk 11.8% pace in the fourth quarter.

Economists cautioned that it is too early to blame the cooling in business investment and other more recent signs of economic softness on the $85 billion in mandatory government spending cuts, known as the sequester, that began on March 1.

Homebuilding marked an eighth quarter of growth in a row, though the pace moderated from the fourth quarter. Housing added to growth last year for the first time since 2005 and its recovery should help ensure the economy does not contract.

While export growth rebounded in the first three months of the year, it was outpaced by imports, resulting in a trade deficit that cut off half a percentage point from output.