Economic growth trimmed on consumer and business spending

WASHINGTON Fri Jun 25, 2010 4:36pm EDT

A sign in the window of a retail shoe store advertises for jobs in San Francisco, California June 3, 2010. REUTERS/Robert Galbraith

A sign in the window of a retail shoe store advertises for jobs in San Francisco, California June 3, 2010.

Credit: Reuters/Robert Galbraith

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WASHINGTON (Reuters) - Economic growth was slower than previously reported in the first quarter on lower consumer spending on services, raising concerns the recovery would be too sluggish to bring down unemployment.

Gross domestic product expanded at a 2.7 percent annual rate instead of the 3 percent pace reported last month, the Commerce Department said in its final estimate on Friday.

Although the pace was below market expectations of 3 percent it still marked three straight quarters of expansion as the economy digs out of its worst downturn since the 1930s.

While analysts see little threat of another recession they worry growth could prove too anemic to bring down a near 10 percent unemployment rate. Data on spending for May has pointed to a slowdown in the pace of recovery.

"My concern is that the soft patch of data that we have seen through May looks like it will continue for at least another month and the economy takes half a step closer to stall speed, about two percent GDP growth," said Robert Dye, a senior economist at PNC Financial Services in Pittsburgh.

"We need to be generating growth at a minimum of two-and-a-half to three percent to generate the number of jobs we need to bring unemployment down in a way that is visible to the population."

Restoring the economy back to health is one of the key priorities for President Barack Obama, whose approval ratings have been damaged by stubbornly high unemployment.

Public dissatisfaction with the economy's performance after a record $787 billion stimulus threatens the Democratic Party's control of Congress in November mid-term elections.

The Federal Reserve this week struck a cautious note on the economy and said the recovery was "proceeding." The Fed -- the U.S. central bank -- left overnight lending rates in a zero to 0.25 percent range and renewed its commitment to an ultra-low interest rate policy.

Despite the tepid recovery, consumers are gradually feeling more confident in the economy. The Thomson Reuters/University of Michigan's consumer sentiment index rose to 76 in June, its highest since January 2008, from 73.6 last month. Economists had expected a reading of 75.5.

CONSUMER SPENDING TRIMMED

Stocks on Wall Street .DJI .SPX .IXIC initially fell on the GDP report. However they recouped losses to end flat to modestly higher as technology shares rose following strong results from Oracle Corp ORCL.O and banks gained after lawmakers hammered out a historic overhaul of financial regulations.

The U.S. dollar fell against the euro while prices for government debt rose.

Growth in GDP, which measures total output within U.S. borders, has slowed from a 5.6 percent pace in the fourth quarter, when much of the lift came from government stimulus and a slowdown in the rate at which businesses were selling off inventories.

The new softer reading for the January-March period reflected a downward revision to growth in consumer spending, which the department said rose at a 3 percent clip, not the 3.5 percent it had thought a month ago.

Spending on services was lowered to a 1.4 percent growth pace from 2 percent previously.

"Given a weaker growth path for service consumption, growth prospects for 2010 have been trimmed," said Mike Englund, chief economist at Action Economics in Boulder, Colorado.

Despite the downward revision, growth in consumer spending, which normally accounts for about 70 percent of U.S. economic activity, was still double the 1.6 percent rate in the fourth quarter and the largest advance in three years.

A downward adjustment to business spending, which rose at a 2.2 percent rate instead of the 3.1 percent reported previously, also weighed on the GDP reading. Business spending had risen at a 5.3 percent pace in the fourth quarter.

A wider trade deficit and the biggest drop in spending by state and local governments since the second quarter of 1981 also restrained growth in the first quarter.

Home building also slumped after two straight quarters of growth, underscoring the fragility of the housing market's recovery from a three-year downturn.

Although a rebuilding of business inventories was a source of growth in the quarter, analysts expect the contribution from restocking to fade in the second half of the year.

Weak demand during the recession forced businesses to slash stocks to record low levels and the rise in inventories in the first quarter was the first in two years.

Excluding the boost from inventories, the economy grew at a 0.8 percent pace, far less than the 1.4 percent reported last month.

"Growth will soon slow as the rebound in world trade fades, inventory rebuilding slows and the size of the fiscal injection shrinks," said Paul Dales, a U.S. economist at Capital Economics in Toronto.

However, Dales noted the United States continued to outperform Europe, where austerity measures by some governments to cut huge budget deficits could stifle growth.

The GDP report showed after-tax corporate profits rose 5 percent in the first quarter, a much better performance than the 2.1 percent gain estimated last month. Profits increased 6.5 percent in the final three months of 2009.

(Additional reporting by Caroline Valetkevitch in New York; Editing by James Dalgleish)

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Comments (10)
KarlQ wrote:
Stagnation, followed by stagflation iff other nations get THEIR act together and become a better place to invest money.

Jun 25, 2010 10:21am EDT  --  Report as abuse
timOregon wrote:
Congress always has to “adjust” the numbers they release as they are complete failures at their objective and their overall jobs.

This all comes down to unemployment.

Congress has failed the people.

I am not one of the unemployed however see the need for Unemployment extensions… The fact that Congress cannot find other cuts is unacceptable; they always go after what is needed the most and save their pet projects and Wall Street friends.

Congress needs to be held accountable for the their failure to create a jobs bill and a jobs market. Extending Unemployment is not the answer however it what is needed now.

The Answer is to create jobs, which will take Congress placing higher taxes on any company that out sources jobs over seas, higher taxes on any funds leaving the US and higher tariffs on imports. Until then we have to pay out unemployment for the failure of our leaders.

Support unemployment here, it is one of Change.org highest all time petitions.

http://www.change.org/petitions/view/the_99ers_need_ a_tier_v_added_ to_unemployment _benefits

Jun 25, 2010 10:53am EDT  --  Report as abuse
Handel wrote:
Congress hasn’t failed the people Obama and his Liberals have failed the people. I thought one was required to take some economics classes to get into Harvard Law School, unless Obama failed them and got through anyway. Obama doesn’t have a clue .He likes to follow the examples of failed economies of the former Soviet Union, Cuba and Venezuela.

Jun 25, 2010 11:23am EDT  --  Report as abuse
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