U.S. Economy Grows at 2.2% Annual Rate, Less Than Forecast
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The U.S. economy expanded less than forecast in the first quarter as a smaller contribution from inventories overshadowed the biggest gain in consumer spending in more than a year.
Gross domestic product, the value of all goods and services produced in the U.S., rose at a 2.2 percent annual rate after a 3 percent pace, Commerce Department figures showed today in Washington. The median forecast of economists surveyed by Bloomberg News called for a 2.5 percent rise. Household purchases increased 2.9 percent, exceeding the most optimistic projection. Homebuilding grew the fastest in almost two years.
Job creation and income gains were enough to propel sales at car dealerships and retailers like Target Corp., helping make the U.S. more resilient to weakness in overseas markets. The report confirms the view of Federal Reserve officials who this week said they expect “moderate” and repeated that borrowing costs are likely to stay low at least through late 2014.
“Consumers are remarkably stable and steady,” said Julia Coronado, chief economist for North America at BNP Paribas in New York, who correctly estimated first-quarter GDP. “We’ll need to see final demand continue to improve. We’re still in muddling-along territory.”
Stocks rose as earnings at companies such as Amazon.com Inc. beat analysts’ estimates. The Standard & Poor’s 500 Index climbed 0.3 percent to 1,403.7 at 9:40 a.m. in New York. Treasuries were little changed, with the 10-year note yield at 1.95 percent compared with 1.94 percent late yesterday.
Forecasts of the 85 economists in the Bloomberg survey ranged from gains of 1.2 percent to 3.6 percent. The GDP estimate is the first of three for the quarter, with the other releases scheduled for May and June when more information becomes available.
In addition to the pickup in consumer purchases and homebuilding, the economy also benefited from a jump in auto production. GDP was restrained by a drop in government spending and slower growth in business investment in equipment and in inventories.
The U.S. is doing better than some of the other major economies. The U.K. economy slipped into its first double-dip recession since the 1970s, figures showed this week. In Japan and Germany, gross domestic product dropped in the final three months of 2011, while China, the world’s second-largest economy, is also cooling.
“The U.S. is where the strength is,” Sandy Cutler, chairman and chief executive officer at Eaton Corp., said on an April 23 conference call with analysts. “The markets outside the U.S. are not where the strength is this year.”
The Cleveland-based company predicted its U.S. markets, including electrical, hydraulics, aerospace, truck and automotive, will rise 9 percent this year, up from an earlier estimate of 6 percent. For its markets abroad, Eaton reduced its growth forecast to 2 percent from 4 percent, Cutler said.
Jobs and the economy are a central theme in political sparring between President Barack Obama and Republican challenger Mitt Romney. Obama’s job approval rating reached 50 percent in a Gallup Daily tracking poll for April 21-23. The telephone survey of 1,534 adults has a margin of error of plus or minus 3 percentage points. The 50 percent approval mark is notable because all incumbent presidents since Dwight Eisenhower at or above the level at the time of the election were re- elected, according to Gallup.
Most of the U.S. growth last quarter came from an expansion of demand rather than from stockpiling. Final sales, which strip out inventories, climbed 1.6 percent after a 1.1 percent gain in the final three months of 2011.
Recent gains in stock prices have come on the heels of improved corporate earnings. Earnings have beaten analysts’ estimates at about 75 percent of the companies in the Standard & Poor’s 500 Index that released results since April 10, according to data compiled by Bloomberg.
The rise in household consumption followed a 2.1 percent gain in the prior quarter and exceeded the 2.3 percent median forecast in the Bloomberg survey. Purchases added 2 percentage points to growth.
A job market that’s improved since the end of 2011 is underpinning demand. Employers increased payrolls by 635,000 from January through March, the biggest quarterly gain since the first three months of 2006, data from the Labor Department show. At the same time, the jobless rate has been above 8 percent for the past three years.
Americans dipped into savings as they increased their purchases, today’s data showed. Disposable income after inflation rose 0.4 percent in the first quarter following a 1.7 percent gain. The saving rate from January through March eased to 3.9 percent from 4.5 percent.
‘Difficulty Gaining Traction’
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.”
Faster employment growth may have alleviated some of the strain from higher fuel prices. The cost of a gallon of gasoline at the pump jumped 65 cents from the beginning of the year to $3.93 on March 31, which was the highest level in 10 months, according to AAA, the largest U.S. auto group.
“The industry and consumers have been very resilient in the face of higher pump prices,” Don Johnson, vice president of U.S. sales at General Motors Co., said on a call with analysts on April 3. “The steadily improving economy is playing a role and so is pent-up demand and an improved credit market.”
Cars sold last quarter at the fastest pace in four years, according to industry data.
Retail purchases advanced at an average rate of 0.8 percent in the first quarter, the fastest in a year, as stores offered discounts and shoppers stocked up early on spring gear. Same- store sales at Target, the second-largest U.S. discount chain, and Gap Inc., the biggest U.S. apparel chain, beat the average estimate of analysts.
Unseasonably mild temperatures may have also spurred activity from retail and restaurant sales to homebuilding. The January to March period was the warmest first quarter on records going back to 1895, according to the National Oceanic and Atmospheric Administration.
Las Vegas Factory
Small businesses such as Spreadshirt Inc. are also benefiting from the pickup in consumption. The print-on-demand t-shirt company had a 108 percent increase in sales in the first quarter from a year ago. The company, which is based in Leipzig, Germany, is opening a factory in Las Vegas and will add 90 employees to its current U.S. staff of 150 as more of its customers buy shirts, according to Vice President Mark Venezia.
Sales have been “remarkable,” Venezia said. “With this growth we’re looking at expansion into other countries. We’re investing in more equipment.”
Business investment cooled. Corporate spending on equipment and software climbed at a 1.7 percent pace, the weakest in almost three years, after advancing at a 7.5 percent rate in the previous quarter. It contributed 0.1 percentage point to growth.
Stronger auto production bolstered the economy last quarter. Motor vehicle output added 1.12 percentage points to growth, the most since the third quarter of 2009, after 0.47 percentage points in the fourth quarter.
Rising auto and industrial demand will keep factories busy even as manufacturing, a driver of the economic rebound, cools to a more sustainable pace, economists said. 3M Co., the maker of fuel system tune-up kits and Post-it Notes, reported a first- quarter profit that beat analysts’ estimates.
Texas Instruments Inc. this week forecast second-quarter earnings that may top some analysts’ estimates, and Chief Executive Officer Rich Templeton in a statement referred to the “breadth of increased orders across geographical regions and markets.”
A smaller boost came from inventories, which contributed 0.6 percentage point to GDP growth after 1.8 percentage points at the end of 2011. Stockpiles were rebuilt at a $69.5 billion annual pace, after a fourth-quarter rate of $52.2 billion.
The trade gap and inventories are two of the most volatile components in GDP calculations. The trade deficit was little changed at $410.1 billion.
“Domestic demand will be more of a driver than overseas demand, which means the recovery should be more powerful,” Joseph Carson, director of global economic research at AllianceBernstein LP in New York, said before the report.
Sustained domestic demand will help make the U.S. expansion more resilient, cushioning the nation against cooling exports amid Europe’s debt crisis and a slowdown in global growth.
The Federal Open Market Committee “expects economic growth to remain moderate over coming quarters and then to pick up gradually,” it said in an April 25 statement at the conclusion of a two-day meeting in Washington. “The unemployment rate has declined but remains elevated.”
Other areas of the economy that struggled include spending by state and local governments, which decreased at a 1.2 percent annual rate, after a 2.2 percent drop. Outlays by federal agencies declined 5.6 percent. National defense spending slumped 8.1 percent, following a 12.1 percent decrease the prior quarter.
A stabilization in housing, which “remains depressed” according to the Fed’s statement this week, also aided first- quarter GDP growth. Residential construction increased at a 19.1 percent rate, up from an 11.6 percent advance in the prior three months.
A measure of inflation, which is tied to consumer spending and strips out food and energy costs, climbed at a 2.1 percent annual pace compared with 1.3 percent in the prior quarter.
Fed officials have defined their inflation target as 2 percent a year.