U.S. Growth Trails Forecasts

Fourth-quarter GDP rose 2.5% as decline in defense outlays undercut gain in consumer spending.

The U.S. economy grew less than forecast in the first quarter as a drop in defense outlays undercut the biggest increase in consumer spending in two years.

Gross domestic product rose at a 2.5 percent annual rate, lower than forecast, after a 0.4 percent fourth-quarter advance, Commerce Department figures showed today in Washington. The median estimate of 86 economists surveyed by Bloomberg called for a 3 percent gain. Consumer spending, the biggest part of the economy, climbed by the most since the fourth quarter of 2010.

A boost to wealth from rising stock and home prices, combined with a reduction in savings, helped Americans cushion an increase in the payroll tax that has now begun to pinch. Recent data signal the strength in other parts of the economy may also not be sustained as across-the-board cuts in planned federal spending, together with slower stockpiling by companies, may be restraining investment and employment.

“We saw some good resilience from the consumer, particularly given all the headwinds,” said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York. “The weakness in government spending is an issue. It’s going to be tough to repeat the first-quarter performance this quarter.”

Stock futures remained lower after the report. Futures on the Standard & Poor’s 500 Index expiring in June declined 0.3 percent to 1,577.40 at 8:59 a.m. in New York.

Economists’ GDP forecasts ranged from 1 percent to 3.8 percent. The estimate is the first of three for the quarter, with the other releases scheduled for May and June when more information becomes available.

In addition to consumer spending, growth in the first quarter was driven by a rebound in stockpiling and a gain in residential construction.

Government outlays declined for the 10th time in the past 11 quarters, restraining growth. Defense spending dropped at a 11.5 percent annualized pace following a 22.1 percent plunge in the last three months of 2012. That was the biggest back-to-back decline on average since 1954, when the military demobilized after the Korean War.

Today’s report showed household consumption, which accounts for about 70 percent of the economy, climbed at a 3.2 percent rate following a 1.8 percent increase from October through December, and compared with the 2.8 percent median forecast in the Bloomberg survey. Purchases added 2.24 percentage points to growth.

Americans boosted spending by putting less money in the bank. The saving rate dropped to 2.6 percent in the first quarter, the lowest since the fourth quarter of 2007, from 4.7 percent in the last three months of 2012.

 

Earnings Drop

Another reason for the slump in saving was that earnings plunged. Disposable income adjusted for inflation dropped at a 5.3 percent annualized rate from January through March, the biggest drop since the third quarter of 2009, after a 6.2 percent gain in the fourth quarter.

In addition to the increase in the payroll tax last quarter, the hit to incomes reflected companies’ accelerated dividend and bonus payments in the fourth quarter.

Corporate spending on equipment and software climbed at a 3 percent annualized pace. It had risen at a 11.8 percent rate in the previous quarter.

Inventory accumulation picked up, adding 1 percentage points to GDP growth. Stockpiles were rebuilt at a $50.3 billion annualized pace after a $13.3 billion rate.

Excluding inventories, the economy grew at a 1.5 percent annualized rate last quarter, down from a 1.9 percent gain in the fourth quarter.

Residential construction increased at a 12.6 percent annualized rate, adding 0.3 percentage-point to growth.

The report also showed price pressures remain contained. A measure of inflation, which is tied to consumer spending and strips out food and energy costs, climbed at a 1.2 percent annualized pace compared with 1 percent in the prior quarter.

The lagged effect from a 2 percentage-point jump in the payroll tax at the start of 2013, and $85 billion in automatic budget cuts that began March 1, may take a toll this quarter. The economy will grow at 1.5 percent pace, before reaccelerating to an average 2.4 percent rate of expansion in the last six months of the year, according to a separate Bloomberg survey.

The Congressional Budget Office has estimated the sequestration alone will reduce GDP this year by 0.6 percentage point.

 

Fed Stimulus

Federal Reserve policy makers have said they will maintain stimulus until the labor market improves “significantly.” The economy’s inability to sustain faster growth means central bankers will probably affirm a pledge to keep buying bonds when they meet next week.

CSX Corp., the largest East Coast rail carrier, is among companies looking ahead to a better second half. Jacksonville, Florida-based CSX reported first-quarter earnings that topped analysts’ estimates.

The key economic indicators “point to slow steady growth in the U.S. economy,” Clarence Gooden, chief commercial officer, said on an April 17 earnings call. “Forward projections show continued slow growth in the near-term, with improved growth rates later in the year.”

One area that has seen sustained gains is demand is automobiles. Cars sold at an average 15.3 million annualized rate in the first quarter, the most since the same period in 2008, according to figures from Ward’s Automotive Group.

“The only negative real headwinds we see are higher taxes and potentially lower government spending,” Kurt McNeil, vice president of U.S. sales and service at Detroit-based General Motors Co., said on an April 2 conference call. “Everything else seems to be pretty positive,” he said, mentioning jobs, housing and stock market performance.

The residential real-estate market also remains a bright spot as borrowing costs near a record low help draw buyers. Builders began work on an average 969,000 homes at an annualized rate in the first three months of the year, the most in any quarter since April through June 2008.

Business investment, another contributor to growth, is cooling as the so-called sequestration, or planned federal budget cuts, take hold. Bookings for goods meant to last at least three years slumped in March by the most in seven months, figures showed this week.

Unless demand picks up, companies may see less need for inventory accumulation, which rebounded last quarter after being a drag on growth in the final three months of 2012, economists said.

 

 Bloomberg News

 

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