The US economy regained speed in the first quarter, but not as much as expected, heightening fears it could struggle to cope with deep government spending cuts and higher taxes.
GDP expanded at a 2.5 percent annual rate, the US Department of Commerce said on Friday, after growth nearly stalled in the fourth quarter. Economists had expected at least a 3 percent growth pace.
“It wasn’t the bang-up start to the year we had hoped for, and the signals from March suggested that we will only decelerate from here,” said Avery Shenfeld, chief economist at CIBC World Markets in Toronto.
Growth rebounded in the early part of this year, but data ranging from employment to retail sales and manufacturing weakened substantially last month.
It appears the factory sector slowed further this month and many forecasters expect the economy’s softness to persist into the third quarter before a convincing revival emerges, given belt-tightening in Washington.
A 2 percent payroll tax cut expired at the start of the year and US$85 billion in mandatory spending cuts, known as the sequester, started to take hold at the beginning of last month.
Second-quarter growth is expected to come in at about a 1 percent pace, with growth for the full year seen at about a sluggish 2 percent, about the same as in the prior three years.
“It certainly seems like we are in store for a significantly lower rate of growth than we saw here in the first quarter,” said Sam Bullard, a senior economist at Wells Fargo Securities in Charlotte, North Carolina.
Government spending has already been on a downward path.
In the first three months of the year, it fell at a 4.1 percent pace as defense outlays dropped sharply for a second straight quarter. It has now moved lower in 10 of the last 11 quarters.
“The decline in government spending over the past two quarters is the biggest six-month contraction since the Korean war ended,” Paul Ashworth, chief US economist at Capital Economics in Toronto, said in a research note.
While consumer spending increased solidly, it came at the expense of saving, which does not bode well for the future.