First quarter US growth slumps below expectations

President Barack Obama. Photo / AP

Slumping Government spending, weaker exports and renewed caution on the part of consumers conspired to slow economic growth in the United States in the first three months of 2011.

The world's largest economy grew at an annualised rate of 1.8 per cent in the first quarter - down from its 3.1 per cent pace at the end of last year - underscoring the sluggish and volatile nature of the recovery from recession.

Any hopes that economic growth might be enough to quickly bring down an unemployment rate that is still at 8.8 per cent were dented by the latest weekly benefit claims figures, also released yesterday, which showed an unexpected jump in the numbers joining the unemployment rolls.

Economists scaled back their expectations for the first quarter GDP figure as February and March drew on, but the first estimate published by the Commerce Department yesterday was modestly weaker than even those lower forecasts. The consensus estimate had been 2 per cent.

Many analysts noted temporary factors were keeping the figure low. Federal government spending dropped 7.9 per cent, with defence spending down 11.7 per cent, and commercial construction unexpectedly plunged 21.8 per cent.

"Wild swings in government spending from quarter to quarter are not uncommon and are usually reversed quickly, and a severe series of winter storms held back construction in the first quarter," said Kevin Logan, chief US economist at HSBC.

But he added: "For the year as a whole, constraints on government spending, in combination with moderate growth in consumer spending, will probably keep GDP growth below 3 per cent. It appears likely that GDP growth will fall short of the Fed's recent forecast of 3.1 per cent to 3.3 per cent on a fourth quarter-to-fourth quarter basis."

Earlier this week, the Federal Reserve cut its expectations for 2011 growth to the 3.1-3.3 per cent range, from an earlier forecast of 3.4-3.9 per cent, largely because of the disappointing start to the year. The central bank also promised to continue its unprecedentedly loose monetary policy for an extended period.

The GDP figures showed that trade was a drag on the economy in the first three months, while growth in the value of exports slowed from 8.6 per cent in the fourth quarter of 2010 to 4.9 per cent. Consumer spending, which accounts for more than two-thirds of economic activity, slowed from 4 per cent to 2.7 per cent.

Kathy Bostjancic, director for macroeconomic analysis at business research body The Conference Board, called the disappointing first quarter GDP result "a pause, not a trend", but cautioned: "Moderate growth is not enough to meaningfully lower the unemployment rate or help tackle our large fiscal challenges. A higher growth trajectory will require substantially more business investment, jobs and personal income to support consumer spending."

That was a sentiment echoed by the White House. "Today's report shows that the economy posted the seventh straight quarter of positive growth, but while the continued expansion is encouraging, clearly, faster growth is needed to replace the jobs lost in the downturn," said Austan Goolsbee, chairman of President Barack Obama's Council of Economic Advisers.

The broad measure of inflation described in the GDP figures, the personal consumption expenditures price index, rose at a rate of 3.8 per cent - its fastest pace since the third quarter of 2008 - after increasing 1.7 per cent in the fourth quarter. The core index, which excludes food and energy costs, accelerated to 1.5 per cent.

- INDEPENDENT