U.S. economic growth disappoints

(MoneyWatch) The U.S. economy grew 2.5 percent in the first three months of 2013, undershooting forecasts of stronger growth and raising concerns that the recovery is losing momentum.

Many economists had expected growth of 3 percent or higher. The increase in GDP, which represents the government's initial estimate of economic output in the period and which is subject to revision, is not fast enough to support significant job-creation. The economy expanded at a meager 0.4 percent rate in the fourth quarter of 2012 after growing at a 3.1 percent clip in the previous period.

"The U.S. economy is headed for another 'spring swoon' -- the fourth in four years -- this time brought on by the sequester," said Nariman Behravesh, chief economist at IHS Global Insight, in a research note.

While acknowledging that the latest GDP estimate is less than stellar, other experts said the increase in the January-to-March quarter shows the economy is continuing to recover. They credit the Federal Reserve's policy of keeping interest rates low and buying government debt with at least partly offsetting the adverse impact of the sequester, the massive government spending cuts that kicked in last month.

The Commerce Department said Friday that personal consumption, home construction and businesses moving to restock their shelves boosted growth. Consumer spending rose at an annual rate of 3.2 percent. The main headwinds came in the form of cutbacks in federal, state and local government spending. The fall in military outlays was especially sharp, dropping 11.5 percent.

"The economy is in a battle between fiscal drag on one side and monetary stimulus on the other," said Jim O'Sullivan, chief U.S. economist for High-Frequency Economics, ahead of the growth report. "Over time, the Fed is winning."

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For now, as the latest economic figures show, victory remains elusive. Plunging job-creation in March stirred fears that the economy was sputtering after two straight months of solid job growth. Retail sales shrank last month as consumers pulled back on spending. That appeared due to a move by Congress and President Barack Obama to allow Social Security taxes to rise in January, which reduced people's paychecks and eroded their purchasing power.

Elsewhere in the economy, orders for aircraft and other big-ticket items also have sunk in recent weeks, indicating that companies expect business to slow. Business investment rose a modest 2.1 percent in the latest quarter, down from a 13.2 percent gain in the final quarter of last year.

Meanwhile, the full impact of the sequester cuts has yet to be felt, with government agencies like the FAA only now starting to furlough workers. High-Frequency Economics predicts that the spending cuts and payroll tax increase will erase 1.5 percent from growth this year.

In a blog post after the economic growth release, White House chief economist Alan Krueger urged lawmakers to strike a fiscal deal and suspend the sequester. "The administration continues to urge Congress to replace the sequester with balanced deficit reduction, while working to put in place measures to put more Americans back to work, like rebuilding our roads and bridges and promoting American manufacturing."

Growth over the rest of the year could struggle to match the first-quarter rise. Research firm Macroeconomic Advisers predicts second-quarter GDP of only 1.2 percent, while for the year as a whole most economists expect growth of 2 to 2.5 percent.

"The global backdrop is still weak," said Paul Ashworth, chief U.S. economist for Capital Economics, before the government report was issued. "Europe is in recession, and growth in China isn't great."

Still, Ashworth doesn't think the economy is likely to tank. Flagging growth in 2012 and 2011 owed largely to severe shocks to the global economy, notably the raging debt crisis in Europe and the Japanese earthquake two years that disrupted global trade. 

What's different this year? For one, energy costs are falling, with the national average price for gas down 28 cents since late February to $3.51 a gallon, according to AAA. Perhaps more important, housing continues to rebound. That typically benefits the broader economy by encouraging household spending and bolstering the vital construction sector. Although the overall level of home sales remains well below normal, the real estate market is clearly gaining strength.  

"There are negatives out there for sure with foreign growth weak in Europe and the fiscal drag," O'Sullivan said. "But monetary stimulus is still substantial, the Fed is still easing and financial conditions are easing, so there are more pluses than minuses."

A decrease in the number of Americans who filed for jobless benefits last week also offers hope that the sharp decline in new jobs last month was temporary. After unusually mild weather earlier in the year, a cold snap in many cities in March may have kept at least some people from looking for work. As a result, forecasters think hiring has picked up this month.