US economy likely rebounded in first quarter but spending cuts could dampen future growth

WASHINGTON – U.S. economic growth likely accelerated from January through March from a near-stall at the end of 2012, propelled by a revival in housing, steady consumer spending and increased stockpiling by businesses.

But the faster growth isn’t expected to last. Broad government spending cuts and higher taxes have begun to weigh on the economy, making some consumers and businesses cautious and slowing growth.

Economists predict that the overall economy grew at an annual rate of 3.1 per cent in the January-March quarter, according to a survey by FactSet. That would be a significant improvement from the anemic 0.4 per cent growth rate reported for the October-December quarter.

A 3.1 per cent growth rate would match the robust pace of the July-September quarter last year. Anything stronger than 3.1 per cent would be the economy’s fastest quarterly growth since late 2011.

The Commerce Department will release the report at 8:30 a.m. EDT (1330 GMT) Friday.

Many economists say they think growth as measured by the gross domestic product is slowing in the April-June quarter to an annual rate of just 2 per cent. Most foresee growth remaining weak before picking up in the fourth quarter.

GDP is the broadest gauge of the economy’s health. It measures the total output of goods and services produced in the United States, from haircuts and hamburgers to airplanes and automobiles.

The economy began the year with a big push from the private sector. Steady job gains kept consumers spending. Residential construction rose at the fastest annual pace in nearly five years. And healthy auto sales kept factories bustling.

But now two big decisions in Washington are threatening to slow the economy’s momentum.

In March, lawmakers allowed deep across-the-board spending cuts to begin taking effect. The cuts have forced government agencies to furlough workers, reduced spending on key public projects and made businesses more nervous about investing and hiring this year.

The cuts came two months after President Barack Obama and Congress allowed a Social Security tax cut to expire. That left a person earning $50,000 a year with about $1,000 less to spend this year. A household with two high-paid workers has up to $4,500 less.

Consumers’ take-home pay is crucial to the economy because their spending drives roughly 70 per cent of growth.

Americans appeared to shrug off the tax increase at the start of the year. They boosted spending in January and February, helped by a stronger job market. In part, that’s why growth is expected to be solid in the first quarter.

But hiring slowed sharply in March. And consumers cut back their spending at retail businesses, a sign that many were starting to feel the tax increase. Economists expect spending to stay weak in the second quarter as consumers adjust to their smaller paychecks.

Ben Herzon, an economist at Macroeconomics Advisers, said the tax increases could shave roughly 1 percentage point from growth this year. He also expects the government spending cuts to reduce growth by about 0.6 percentage point.

One area where consumers are feeling some relief is at the gas pump. The national average price for a gallon of gas has fallen by 28 cents since Feb. 27, to $3.51. Analysts say prices could fall 20 cents more over the next two months.

Cheaper gas helps the economy because it makes goods less expensive to transport and gives consumers more money to spend on other things. Over the course of a year, a decline of 10 cents a gallon translates to roughly $13 billion in savings at the pump.

Herzon said cheaper gas is helping blunt some of the effect of the Social Security tax increase.

“If not for the recent decline in gas prices, the outlook for the economy would be even worse,” Herzon said.

Another bright spot for the economy this year is the housing recovery. Residential construction is expected to add to growth in 2013 for a second straight year.

In March, U.S. builders started work on a seasonally adjusted annual rate of more than 1 million homes. It was the first time it had crossed that threshold in nearly five years.

Sales of newly built and previously occupied homes are up from last year. And prices are rising, a trend that makes homeowners feel wealthier and more likely to spend.

Some of the bounce in first-quarter growth is expected to come from a rebound in defence spending and restocking. Both areas were weak in the fourth quarter and had combined to shave 2.8 percentage points from growth.

But defence spending is likely to languish later this year because of the government cuts. And business stockpiling is expected to weaken again in the April-June quarter, as companies react to slower consumer spending.

Despite the decline, economists say they think consumers will help bolster growth later this year.

Brian Bethune, an economics professor at Gordon College in Massachusetts, said stock market gains and higher home prices are making Americans feel more confident in the economy. And cheaper gas should also help support consumer spending.

“I don’t think the drop in gas prices will fully offset the payroll tax increase, but it will buffer it considerably,” Bethune said.