GDP report: Rate of U.S. economic growth slows, but consumers are buying more
By Peter Whoriskey,
Americans have ratcheted up their spending on cars, clothes and furniture, new figures show, and their fortitude at the cash register is energizing the recovery.
The economy grew by an annual rate of 2.2 percent in the first three months of the year, the Commerce Department reported Friday, largely thanks to more consumer spending.
Unfortunately, what people earned isn’t keeping up with their rising bills, and the new figures reflect the financial pressures facing many U.S. households. Moreover, growth of this nature may be unsustainable because eventually consumers will run out of money.
The personal saving rate in the United States declined again for the sixth straight quarter, to 3.9 percent.
“For how long can consumption grow much faster than income and households run down their savings as income growth in Q1 was very mediocre?” tweeted Nouriel Roubini, professor of economics at New York University’s Stern School of Business, also known as “Dr. Doom.”
The drop in saving echoes last month’s report that household debt ticked up again in the last three months of 2011, after declining steadily for three years, according to Federal Reserve figures.
“The savings rate can be going down for one of two reasons — either people are confident about the future, or they are drawing down because they have no other alternative,” said Neil Dutta, an economist for Bank of America Merrill Lynch.
Given the high unemployment rate and depressed housing values, Dutta said, the latter is more likely.
Economists cautioned that the figures reported Friday are preliminary, and may be revised in the coming months.
But the quarterly report on gross domestic product, the value of all goods and services produced in the United States, is one of the most closely watched measures of the economy, particularly in an election year.
Friday’s report will provide talking points for both sides.
The White House drew attention to continued economic expansion.
“We don’t put too much weight on any individual report. Rather, what we examine are the longer-term trends. And today’s report indicates that for the 11th consecutive quarter, we’ve enjoyed economic growth,” White House deputy press secretary Josh Earnest said Friday.
He pointed to “some encouraging data” in the report, including increases in consumer spending, residential housing construction and the auto industry.
Wall Street was apparently pleased with the new numbers as well. The Dow Jones industrial average rose slightly with the news, inching up nearly 0.2 percent in regular trading.
Friday’s growth figure of 2.2. percent nonetheless fell below expectations. The economy had been growing at a rate of 3 percent in the last three months of 2011, and economists had been anticipating growth of 2.5 percent or more, surveys showed.
“Following a strong performance at the end of 2011, this most recent growth rate may be called modest, at best,” said Kathy Bostjancic, director for macroeconomic analysis at the Conference Board.
Republicans focused on the gap between expectations and results. “While I am thankful that the economy continues to expand, the damage being done by the Obama administration’s policies have produced a weak recovery,” said Rep. Kevin Brady (R-Tex.), vice chairman of the Joint Economic Committee.
Consumers’ spending, which accounts for about 70 percent of the economy, rose 2.9 percent in the first quarter, beating expectations. Their spending lifted the economy even as businesses invested more cautiously and government, constrained by post-recession budget woes, cut spending.
The budget woes at all levels of government continue to hamper growth, according to the Commerce Department report. Federal government spending dropped 5.6 percent, with defense spending down 8.1 percent, and those cuts are likely to continue. Congress has called for the defense budget to be reduced by $487 billion over 10 years.
Spending by state and local government dropped by 1.2 percent during the first three months of 2012.
Another key reason for the slowdown was a drop in some business investment, particularly in computers and industrial equipment. That was expected, however, because tax advantages for those purchases expired, economists said.
If determining the health of the economy seems difficult, that may be because it depends on perspective.
Other new data have highlighted a divide between businesses, which appear to be thriving, and workers. During 2011, corporate profits rose by nearly 7 percent, according to Commerce Department figures released last month. Over the same period, employee compensation rose less than 5 percent.
“Measures of profits are well above their pre-recession peaks,” said Scott Hoyt, senior director of consumer economics at Moody’s Analytics. “Businesses are flush right now, but they are very scared. They are hoarding their cash rather than distributing it in hiring, investment or giving it to shareholders.”
Not surprisingly, economists, like politicians, remain divided over the the strength of the recovery.
On Wednesday, Federal Reserve Chairman Ben S. Bernanke defended the central bank’s wait-and-see approach to the economy, announcing that the Fed would take no new actions to boost growth and would keep interest rates near zero into 2014.
Overall, the report signaled that the economy appears to be muddling through despite the economic woes in Europe and $4 gasoline in the United States. It’s far from booming, but it doesn’t seem headed into another recession.
“Not great, but no double-dip,” said Ian Shepherdson, the chief U.S. economist at High Frequency Economics.
Staff writers Marjorie Censer, Amy Gardner and Philip Rucker contributed to this report.