Tags: us | economy | growth | traction

Pimco’s El-Erian: US Economy Having 'Difficulty Gaining Traction'

By    |   Friday, 27 Apr 2012 10:52 AM

The economy grew more slowly in the first three months of this year as governments spent less, and businesses cut back on investment, prompting some economists to call the data a "big disappointment" and warn that the U.S. recovery is "having difficulty gaining traction."

Gross domestic product expanded at a 2.2 percent annual rate, the Commerce Department said on Friday in its advance estimate, moderating from the fourth quarter's 3 percent rate.

While that was below economists' expectations for at least a 2.5 percent pace, a surge in consumer spending took some of the sting from the report and growth was still stronger than analysts' predictions early in the quarter for an expansion below 1.5 percent.

Editor's Note: You Deserve to Know What Obama and Bernanke Are Hiding From Americans

Consumer spending accelerated to an annual rate of 2.9 percent in the first quarter. The strength came from a second robust quarter of growth in auto purchases. Consumer spending is closely watched since it accounts for 70 percent of economic activity.

Government spending fell at an annual rate of 3 percent in the first quarter.

The biggest factor was a sharp drop in defense spending. All levels of government are under pressure as they struggle to control budget deficits.

Chris Williamson, chief economist with the research firm Markit in London, pointed to a 2.1 percent annualized drop in business investment as a "big disappointment," the Associated Press reported.

The drop “raises the question, ‘How long can we continue to consume by saving less?’” said Mohamed El-Erian, chief executive officer of Pacific Investment Management Co., the world’s biggest manager of bond funds. “We are in an economy that is having difficulty gaining traction, and the engines are not sustainable engines,” he told Bloomberg.

The Federal Reserve is likely to provided additional assistance if the U.S. economy weakens further, though there is “no immediate need” to do so, El-Erian, the chief executive officer of the world’s largest manager of bond funds, said on Bloomberg Television’s “In the Loop” with Betty Liu.

There were other signs of underlying strength, with even home construction rising at its fastest pace since the second quarter of 2010, thanks to the unusually warm winter.

But business spending fell for the first time since the fourth quarter of 2009, with investment in equipment and software rising at its slowest pace since the recession ended.

"It is disappointing that business investment fell, but that could prove temporary," Mark Zandi, chief economist at Moody's Analytics in West Chester, Pa., told Reuters.

The report will probably not change views on monetary policy. Federal Reserve Chairman Ben Bernanke on Wednesday expressed comfort with the current stance of Fed policy, but held out the prospect of more bond buying if the economy deteriorated.

Editor's Note: You Deserve to Know What Obama and Bernanke Are Hiding From Americans



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