GDP up 2.5 percent: Smaller-than-expected bounce for US economy

GDP flashed 2.5 percent growth in the first quarter: much better than the fourth quarter but below expectations. Economists expect another slowdown in GDP growth for the summer.   

David Duprey/AP/File
Jack Yonally rings out a customer at Lodge's store in Albany, N.Y., in February. The economy grew at a 2.5 percent annual rate in the first quarter, the Commerce Department reported Friday. That boost in gross domestic product was less than many economists expected.

After barely expanding at all in the last three months of last year, the US economy has found its old groove: sluggish but steady growth in the face of deepening federal spending cuts.

The economy grew at an annual rate of 2.5 percent in the first quarter of 2013 as measured by real gross domestic product (GDP), the Commerce Department reported Friday. That was far better than the 0.4 percent annualized rise in the fourth quarter of 2012 but below the 3 percent that many economists expected.

"The underlying picture is not one of a sustainable ramp up in demand growth," writes Peter Newland, an economist at Barclays Research in New York, in an analysis. "There is no clear indication that underlying demand has either strengthened nor slowed in the recovery cycle to date."

The 2.5 percent GDP rise may be as good as it gets this year, economists warn. Strong growth in residential construction and auto sales is being partially offset by the drag from the federal government in the form of higher taxes (actually, the end of a temporary payroll tax cut) and lower federal spending. The end of the payroll tax cut came in January, helping to slash current disposable personal income by a 4.4 percent annual rate, its biggest decline since the recession. The federal spending cuts, or sequester, took place in March and is expected to intensify this quarter.

Defense spending took the biggest hit, falling an annualized 11.5 percent in the first quarter, while nondefense spending fell at a 2.0 percent rate. Furloughs and spending cuts in other areas of the federal government will be even more in evidence this quarter. The Congressional Budget Office estimates the sequester could shave 0.6 percentage point off GDP growth for the year.

Another big factor in economic growth is the consumer (responsible for more than two-thirds of economic activity). In the first quarter, consumers' real personal consumption expenditures rose a surprisingly strong 3.2 percent, compared with a 1.8 percent rise in the fourth quarter.

That rate will be difficult to sustain in the months ahead. Many economists expect more weakness in consumer spending in the wake of the decline in their personal income. Already in March, consumer spending was showing signs of slowing.

"We continue to believe that this economy is a '2%-ish' grower," writes Joshua Shapiro, chief US economist at MFR Inc. in New York. Year-to-year measures (which smooth out some of the quarter-to-quarter volatility in GDP) have stayed in the range of 1.5 percent to 2.5 percent annual growth for several years, he points out.

Slower economic growth also suggests weaker hiring in the months ahead. "The US economy is growing just above stall-speed, as 2.5 percent growth is consistent with just the lightest downward pressure on unemployment rates," the Economic Policy Institute, a liberal, Washington-based think tank, said in a statement.

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