Sun, Apr 29, 2012 - Page 11 News List

Inventories, low spending curb US’ Q1 growth

STEADY RECOVERY:A rise in demand for autos helped offset the drag from lower business spending and a surprise drop in defense spending

Reuters, Washington

US economic growth cooled in the first quarter as businesses cut back on investment and restocked shelves at a slower pace, but the biggest rise in consumer spending in more than a year cushioned the blow.

GDP expanded at a 2.2 percent annual rate, the Commerce Department said on Friday, moderating from the fourth quarter’s 3 percent rate.

Economists had expected somewhat firmer growth, but were taken by surprise by another big drop in defense spending. Still, growth was stronger than the 1.5 percent or less pace analysts had anticipated early in the quarter.

While the growth pace remained too slow to offer comfort to US President Barack Obama as he seeks a second term, it did not appear weak enough to alter the wait-and-see stance on monetary policy at the Federal Reserve.

“There’s nothing catastrophic happening, this is just slow growth and this underscores that the economy is on sound footing, but nothing more,” said Steven Baffico, chief executive at Four Wood Capital Partners in New York.

Government spending dropped for a sixth straight quarter as defense outlays fell and austerity at state and local governments showed few signs of easing.

A rise in demand for automobiles, which powered the largest pick up in consumer spending since the fourth quarter of 2010, helped offset the drag from government and business spending, which dropped for the first time since the recession ended.

The slump in business spending was likely to be temporary and related to the expiration of tax incentives for businesses, economists said. Corporations are sitting on a US$2 trillion cash pile.

In another heartening sign, home construction rose at its fastest pace since the second quarter of 2010, thanks to an unusually warm winter.

Economists said that while growth was not weak enough to spur the Fed into another round of bond buying, it still bolstered the central bank’s view that interest rates should be kept near zero at least through late 2014.

Though consumers took up the slack for growth in the first quarter, some details of the report painted a somewhat weak picture for the second quarter.

Consumer spending, which makes up about 70 percent of US economic activity, increased at a 2.9 percent rate in the first quarter after rising 2.1 percent in the final three months of last year.

Automakers had reported that sales rose by the most in four years during the first quarter. Part of that reflected pent-up demand after last year’s earthquake and tsunami in Japan left showrooms bereft of popular models.

Motor vehicle production contributed 1.12 percentage points to first-quarter GDP growth, more than double the prior quarter, and spending on so-called durable goods, like autos, rose at a 15.3 percent pace.

Consumer confidence was little changed this month, a separate report showed. The Thomson Reuters/University of Michigan’s final reading on the overall index on consumer sentiment inched up to 76.4 from 76.2 in March.

Inventories contributed just over half a percentage point to GDP growth compared to 1.81 percentage points in the fourth quarter. Still, that suggests that restocking could be a drag on second-quarter GDP growth.

Excluding inventories, GDP rose at a 1.6 percent rate. In the fourth quarter, the comparable figure was just 1.1 percent.

Rising inflation pressures as energy prices soared also restrained GDP growth. A price index for personal spending rose at a 2.4 percent rate, accelerating from the fourth quarter’s 1.2 percent pace.

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