SALON

Friday, Apr 26, 2013 1:56 PM UTC

U.S. economy expands 2.5 percent through first quarter

But government spending has fallen, and the combination of tax increases and budget cuts could slow future growth

By

Topics: Associated Press, U.S. Economy, Unemployment, sequester, Tax cuts, ,

U.S. economy expands 2.5 percent through first quarterJob seekers wait in line during a job fair in Portland, Ore., on April 24. (Credit: AP/Rick Bowmer)

WASHINGTON (AP) — U.S. economic growth accelerated to an annual rate of 2.5 percent from January through March, buoyed by the strongest consumer spending in more than two years. Government spending fell, though, and tax increases and federal budget cuts could slow growth later this year.

The Commerce Department said Friday that the economy rebounded from an anemic 0.4 percent annual growth rate in the October-December quarter. Consumer spending surged at an annual rate of 3.2 percent — its biggest jump since the end of 2010.

Growth was also helped by businesses, which responded to the greater demand by rebuilding their stockpiles. And home construction rose further.

Government spending sank at a 4.1 percent annual rate, led by another deep cut in defense spending. The decline kept last quarter’s increase in economic growth below expectations of a 3 percent rate or more.

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 percent. Most foresee growth remaining around that subpar level for the rest of the year.

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.

Across-the-board government spending cuts, which began taking effect March 1, have forced federal agencies to furlough workers, reduced spending on public projects and made businesses more nervous about investing and hiring.

Consumers’ take-home pay has also fallen because President Barack Obama and Congress allowed a Social Security tax cut to expire. A person earning $50,000 a year has 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 percent of growth.

Americans appeared to shrug off the tax increase at the start of the year. They spent more in January and February, powered by a stronger job market.

But hiring slowed sharply in March. And consumers spent less at retail businesses, a sign that many were starting to feel the effects of the Social Security tax increase. Economists expect spending to stay weak in the April-June quarter as consumers adjust to smaller paychecks.

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

The drop in government spending cut growth in the January-March quarter by 0.8 percentage point. Three-fourths of that decline came from defense spending.

Already over the past two quarters, the decline in government spending has marked the sharpest six-month contraction since the Korean War ended in 1953, Capital Economics noted.

Income growth slowed sharply after a surge in the final three months of 2012. The fourth-quarter gain had reflected a rush to pay dividends and make bonus payments before higher tax rates took effect Jan. 1. Incomes were also held back last quarter by the higher Social Security tax.

The jump in consumer spending, along with slower income growth, meant that the saving rate fell to 2.6 percent of after-tax income in the first quarter. That was down from 4.7 percent in the October-December quarter.

The first-quarter growth figures will be revised twice more based on more complete data.

More Martin Crutsinger.

Next Article

Related Stories

More Related Stories

Featured Slide Shows

The week in 10 pics

close X
  • Share on Twitter
  • Share on Facebook
  • Thumbnails
  • Fullscreen
  • 1 of 11
  • This photo. President Barack Obama has a laugh during the unveiling of the George W. Bush Presidential Center in Dallas, Tx., Thursday. Former first lady Barbara Bush, who candidly admitted this week we've had enough Bushes in the White House, is unamused.
    Reuters/Jason Reed

  • Rescue workers converge Wednesday in Savar, Bangladesh, where the collapse of a garment building killed more than 300. Factory owners had ignored police orders to vacate the work site the day before.
    AP/A.M. Ahad

  • Police gather Wednesday at the Massachusetts Institute of Technology to honor campus officer Sean Collier, who was allegedly killed in a shootout with the Boston Marathon bombing suspects last week.
    AP/Elise Amendola

  • Police tape closes the site of a car bomb that targeted the French embassy in Libya Tuesday. The explosion wounded two French guards and caused extensive damage to Tripoli's upscale al-Andalus neighborhood.
    AP/Abdul Majeed Forjani

  • Protestors rage outside the residence of Indian Prime Minister Manmohan Singh Sunday following the rape of a 5-year-old girl in New Delhi. The girl was allegedly kidnapped and tortured before being abandoned in a locked room for two days.
    AP/Manish Swarup

  • Clarksville, Mo., residents sit in a life boat Monday after a Mississippi River flooding, the 13th worst on record.
    AP/Jeff Roberson

  • Workers pause Wednesday for a memorial service at the site of the West, Tx., fertilizer plant explosion, which killed 14 people and left a crater more than 90 feet wide.
    AP/The San Antonio Express-News, Tom Reel

  • Aerial footage of the devastation following a 7.0 magnitude earthquake in China's Sichuan province last Saturday. At least 180 people were killed and as many as 11,000 injured in the quake.
    AP/Liu Yinghua

  • On Wednesday, Hazmat-suited federal authorities search a martial arts studio in Tupelo, Miss., once operated by Everett Dutschke, the newest lead in the increasingly twisty ricin case. Last week, President Barack Obama, Sen. Roger Wicker, R.-Miss., and a Mississippi judge were each sent letters laced with the deadly poison.
    AP/Rogelio V. Solis

  • The lighting of Freedom Hall at the George W. Bush Presidential Center Thursday is celebrated with (what else but) red, white and blue fireworks.
    AP/David J. Phillip

  • Recent Slide Shows

  • Share on Twitter
  • Share on Facebook
  • Thumbnails
  • Fullscreen
  • 1 of 11

Related Videos

Comments

 2 Comments

Comment Preview

Your name will appear as username

You may use these HTML tags and attributes: <a href=""> <b> <em> <strong> <i> <blockquote>

follow salon

Most Read

Popular on Reddit

links from salon.com

vote
Facebook has been used to find ex-lovers, childhood BFFs or the one who got away. He used it to find the guy who, without his consent, made him his drug mule.
252 points253 points | 23 comments
vote
“This could be a career ender for Michele Bachmann”
171 points172 points | 75 comments
vote
Poll: 3 in 10 voters say “armed revolution might be necessary” - 29% say they believe they'll have to act "in order to protect our liberties" in the next few years
46 points47 points | 18 comments
vote
"New evidence reveals big banks still illegally foreclosing on thousands of homes – and weak settlement allows it."
27 points28 points | comment
vote
Are millennials delusional? New research suggests that members of "Generation Me" are warped by a profound sense of entitlement
25 points26 points | 18 comments

From Around the Web

Presented by Scribol
listener_new_rect The Listener: "The Shelter Cycle": Raised in a cult

Recommendations