Weak first quarter growth bodes ill for economic outlook

WASHINGTON Thu Jun 28, 2012 12:56pm EDT

A customer looks over produce at the Phoenix Public Market in Phoenix, Arizona August 23, 2011. REUTERS/Joshua Lott

A customer looks over produce at the Phoenix Public Market in Phoenix, Arizona August 23, 2011.

Credit: Reuters/Joshua Lott

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WASHINGTON (Reuters) - The U.S. economy grew only modestly in the first quarter, the government confirmed on Thursday in a report that underscored the economy's vulnerability as global growth slows.

Gross domestic product rose at a 1.9 percent annual rate, with motor vehicle output accounting for more than half the gain, the Commerce Department said. The growth pace, which was unchanged from a prior reading, marked a sharp step down from the fourth quarter's 3 percent advance.

Auto production contributed 1.16 percentage points to GDP growth, reflecting pent-up demand that has since waned.

Excluding autos, GDP grew at only a 0.7 percent rate.

"Given that domestic growth is being generated by the autos sector, as we go into the second quarter, a pretty soft outcome looks likely," said Jeremy Lawson, a senior economist at BNP Paribas in New York.

A separate report from the Labor Department showed the number of Americans filing new claims for jobless benefits edged down last week, but remained in a range that indicated the job market was still struggling to gain traction.

Most economists estimate second-quarter growth at around 2 percent, but they say risks are stacked to the downside, given the debt troubles in Europe and an unclear fiscal policy path at home, which are sapping business and consumer confidence.

"We view the economy as vulnerable to negative shifts in sentiment and escalating uncertainty," said Michael Gapen, a senior economist at Barclays in New York.

CONSUMER SPENDING, EXPORT GROWTH LOWERED

The government lowered its previous forecasts for consumer spending and export growth, suggesting the economy had a bit less momentum as it entered the second quarter than previously thought.

Consumer spending, which accounts for about 70 percent of U.S. economic activity, increased at a 2.5 percent rate in the first quarter, rather than the previously reported 2.7 percent pace.

With retail sales falling in April and May, consumer spending for the second quarter may prove softer.

Exports grew at a 4.2 percent rate in the first three months of the year instead of 7.2 percent. The government has already said they declined in April, reflecting softening demand in China and Europe.

Weak global demand also hurt corporate profits in the first quarter. After-tax corporate profits were lowered to show a 5.7 percent rate of decline instead of 4.1 percent. That was the first decline since the fourth quarter of 2008.

"It highlights that the U.S. is not immune from the weakness in the rest of the world. Corporate profits are likely to remain under pressure, a development that is unlikely to help the employment outlook," said Lawson.

There were some positives in the GDP report, which showed stronger investment in residential and nonresidential structures than estimated earlier. Businesses also kept a careful management of inventories, which could be a boost to second-quarter growth.

However, if domestic demand weakens further, businesses might be forced to scale back on restocking. An easing in consumer spending is also a likely prospect given the travails of the labor market.

Initial claims for state unemployment benefits fell 6,000 to a seasonally adjusted 386,000, the Labor Department said, keeping them in a range that suggests little improvement in the pace of layoffs.

The number of people still receiving benefits under regular state programs after an initial week of aid fell 15,000 to 3.3 million in the week ended June 16. That covered the survey period for June's unemployment rate.

In May, the jobless rate rose to 8.2 percent as people re-entered the labor force to hunt for work.

(Reporting by Lucia Mutikani; Editing by Andrea Ricci and Tim Ahmann)

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Comments (7)
JackinFL wrote:
Clearly we didn’t borrow enough money from Communist China to fix the economy…..!

Jun 28, 2012 9:02am EDT  --  Report as abuse
mulholland wrote:
Not like the “unrevised” number wasn’t jiggered.

Jun 28, 2012 9:12am EDT  --  Report as abuse
Willie12345 wrote:
Enjoying another Recovery Summer. Thanks Joe and Barack.

Jun 28, 2012 9:22am EDT  --  Report as abuse
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