Economic growth slows to 1.8% in first months of 2011

The economy’s growth slowed at the start of the year, according to new data that show the recovery is so weak that it doesn’t take much to knock it off its stride.

Severe winter weather, a dip in defense spending and higher energy prices all slowed the growth of gross domestic product in the January-through-March quarter. The good news is that economists consider all those factors to be temporary events that don’t pose a long-term threat. But at a time when the government is straining for ways to jump-start the economy and when forecasts had called for a strong start to the year, the slowdown came as a disappointment.

(The Washington Post) - First Quarter GDP

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April 27 (Bloomberg) -- Former Federal Reserve Bank of Minneapolis President Gary Stern speaks about Fed policy and the U.S. economy.

April 27 (Bloomberg) -- Former Federal Reserve Bank of Minneapolis President Gary Stern speaks about Fed policy and the U.S. economy.

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The 1.8 percent pace of increase in gross domestic product in the first quarter, according to a Commerce Department report Thursday, is down from a 3.1 percent gain in the final months of 2010. It is also lower than the level of growth that, over time, would be expected to drive down joblessness. The U.S. economy needs to grow about 2.5 percent annually to keep unemployment steady given continual growth in the labor force and in worker efficiency; even stronger GDP growth is needed to bring unemployment down.

“All things considered, it could have been worse,” said Paul Ashworth, chief U.S. economist at Capital Economics, noting the temporary impact of energy prices and other factors. “Nevertheless, in a quarter when the economy began to benefit from additional monetary and fiscal stimulus, we had originally expected a lot more.”

There were some positive signs in the report. Americans increased their spending at a steady 2.7 percent annual rate, and businesses ramped up their spending on equipment and software at an 11.6 percent rate. Those numbers suggest that the two major legs of the economy, consumers and businesses, remained confident despite higher gas prices and global political turmoil.

But the weak first quarter has already led forecasters to mark down their expectations for 2011 as a whole. Leaders of the Federal Reserve, for example, said Wednesday that they expect the economy to grow 3.1 to 3.3 percent in 2011; in January their estimate was 3.4 to 3.9 percent.

In short, if growth were stronger, the economy could handle blows like higher oil prices and January snowstorms that kept consumers away from stores.

The job market was a bright spot in the first quarter, despite the soft growth in economic output, with the unemployment rate falling and job growth coming in strong. But the number of people filing for unemployment insurance benefits has been edging up in recent weeks. The number of new jobless claims rose to 429,000 last week, the Labor Department said in a separate report Thursday, the highest level since January.

While the GDP report showed decent readings on consumer and business spending, the nation’s construction sector is in dire straits, raising risks for the remainder of the year. Investment in housing dropped at a 4.1 percent rate, and the pace of commercial real estate investment fell 21.7 percent. Some forecasters had expected real-estate-related industries to finally join in the recovery in 2011.

“We’ve taken our forecast down just a bit, taking into account factors like weaker construction and possibly just a bit less momentum in the economy,” Federal Reserve Chairman Ben S. Bernanke said in a news conference Wednesday.

But the biggest drag on growth in the first quarter was a decrease in government spending, according to the report. Federal and state spending declined at a 3.3 percent annual rate in the first quarter. Combined, they subtracted 1.1 percentage points from the pace of growth. The depressed rate is part of a longer trend that could subtract from overall economic activity for months or even years to come.

International trade continued to advance but not as much as at the end of last year. Exports rose at a 4.9 percent rate, down from an 8.6 percent rate in the final months of 2010.

 
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