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Pricey Gas Hurts Consumer Spending, Economic Growth More Than Feared

Thursday, 26 May 2011 08:46 AM

High gasoline prices, government budget cuts and weaker-than-expected consumer spending caused the economy to grow only weakly in the first three months of the year.

The economy expanded at an annual rate of 1.8 percent in the January-March quarter, the Commerce Department said Thursday. That was the same as its first estimate a month ago.

Consumer spending grew at just half the rate of the previous quarter. And a surge in imports widened the U.S. trade deficit.

Most economists think the economy is growing only slightly better in the current April-June quarter. Consumers remain squeezed by gas prices, scant pay increases and a depressed housing market.

Analysts estimate that growth has accelerated slightly to around 2.5 percent in the current April-June quarter. For the entire year, they think the economy will grow around 3 percent. That would be little changed from the 2.9 percent growth in 2010.

Economists had been more optimistic when the year began. They assumed that a cut in workers' Social Security taxes, which raised take-home pay, would boost consumer spending. And new business tax breaks were thought likely to spur business spending.

But political upheaval in the Middle East and North Africa sent energy prices soaring. The result was that consumers had to pay more for gas, leaving less money to spend on other items.

The government's revised estimate for gross domestic product — the economy's total output of goods and services — showed consumer spending growing at an annual rate of just 2.2 percent. That's sharply down from an initial estimate of 2.7 percent.

Consumer spending, which accounts for 70 percent of economic activity, had grown at a much faster 4 percent rate in the October-December period.

The GDP revision showed that the government sector is dragging on growth. Government spending fell at an annual rate of 5.1 percent. Both the federal government and state and local governments cut spending to battle budget deficits.

Economists expect government spending to remain weak. Congress will likely slash spending to try to shrink $1 trillion-plus budget deficits.

Exports grew faster than previously estimated last quarter — a brisk 9.2 percent rate. But imports grew even faster, at a 9.5 percent rate — causing the U.S. trade deficit to widen. A higher trade deficit subtracts from economic growth.

Spending by companies on equipment and software grew at a solid rate of 11.6 percent. Economists expect that to continue as companies take advantage of one-year tax write-offs for such purchases.

David Wyss, chief economist at Standard & Poor's in New York, said he thinks the economy will grow at an annual rate of 2.5 percent in the current quarter. Wyss said he expects growth to strengthen slightly to around 3 percent in the second half of this year.

In part, that's because the U.S. manufacturing supply disruptions caused by the Japanese earthquake and nuclear crisis in March should ease. And auto plants and other factories get back to full production.

Still, analysts think the economy may not be able to exceed 3 percent growth for the full year.

"There are just too many headwinds for the economy to fight against at the moment," Wyss said.

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High gasoline prices, government budget cuts and weaker-than-expected consumer spending caused the economy to grow only weakly in the first three months of the year. The economy expanded at an annual rate of 1.8 percent in the January-March quarter, the Commerce Department...
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2011-46-26
Thursday, 26 May 2011 08:46 AM
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