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Portfolio > Economy & Markets

GDP Falters in Q1, Slowing to 1.8% Growth Rate

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WASHINGTON (AP) — The economy slowed sharply in the first three months of the year. High gas prices cut into consumer spending, bad weather delayed construction projects and the federal government slashed defense spending by the most in six years.

The 1.8% annual growth rate in the January-March quarter was weaker than the 3.1% growth in the previous quarter, the Commerce Department reported. And it was the worst showing since last spring when the European debt crisis slowed growth to a 1.7% pace.

Federal Reserve Chairman Ben Bernanke and other economists say the slowdown is a temporary setback. They generally agree that gas prices will stabilize and the economy will grow at a 3% pace in each of the next three quarters.

But gas prices are still going up. The housing market has shown little signs of recovering. And lawmakers are proposing some of the steepest cuts in federal spending in a generation. Those cuts would filter down to state and local governments, which are already wrestling with their own budget crises.

"The economy has lost its modest upward momentum, and headwinds such as rising gasoline prices and further budget cuts suggest the recovery will continue at only a moderate pace going forward," said Sal Guatieri, senior economist at BMO Capital Markets.

The national average for a gallon of gas was $3.88 on Thursday. That's an increase of 30 cents in the first month of the April-June quarter.

An inflation gauge in the report showed consumer prices rose last quarter at the fastest pace in nearly three years. Most of the increase came from higher fuel costs.

Rising gas prices are draining most of the extra money that Americans are receiving this year from a Social Security payroll tax cut.

That's a major reason why consumer spending cooled off in the January-March quarter. Consumers boosted spending at a 2.7% pace, down from the previous quarter's 4% pace and the weakest since last summer. Consumer spending is important because it accounts for roughly 70% of overall economic activity.

"All things considered, it could have been worse," said economist Paul Dales at Capital Economics. Even though consumers spent less, the pace of spending by historical standards is decent. "Nevertheless, in a quarter when the economy began to benefit from additional monetary and fiscal stimulus, we had originally expected a lot more," he said.

Pump prices weren't the only reason spending slowed. Harsh winter weather also kept people from shopping in many parts of the country.

Winter storms — including rare snow that blanketed the South — also forced builders to delay construction projects, a big factor holding back overall economic activity. Builders slashed spending on commercial construction, such as office buildings and factories, at a 21.7% annualized pace, the deepest cuts since late 2009.

Residential construction was also affected. Builders cut spending on housing projects by a 4.1% annualized rate.

The housing market's collapse thrust the economy into a deep recession, and economists say it will take years for the industry to heal. Two years after the recession has ended, the housing market remains depressed.

Bernanke suggested at a news conference Wednesday that the crippled housing market will continue to drag on economic growth. He pointed out that home building and commercial construction were both "very weak" in the first quarter. Normally, construction spending is much stronger at this stage of an economic recovery.

The government is also spending less. The federal government cut military spending at an annualized rate of 11.7% last quarter — the deepest cut since 2005.

Bernanke and other economists expect government defense spending and consumer spending will rebound in the next quarter.

Economists in a new Associated Press survey predict the economy is growing at a 3.2% pace this quarter and that growth will steadily improve over the remainder of the year.

One concern is the rise in prices. An inflation gauge tied to the report showed that consumer prices rose at an annual rate of 3.8%. That's the biggest gain since the summer of 2008, when gasoline prices hit a record high of $4.11 a gallon nationwide.

Stripping out energy and food prices, inflation rose at a rate of 1.5%. That's at the low end of the range of inflation the Federal Reserve believes is needed for a healthy economy.


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