Economy isn't as bad as new data make it look, analysts say

WASHINGTON — Relax, Americans, the economic outlook isn't as bad as Thursday's new data made it appear.

Analysts remained confident that the U.S. economy will continue to grow despite the data showing a sharp slowdown during the first three months of the year, which raised concerns in some quarters that the fragile recovery may be sputtering back into weakness and rising unemployment.

The Bureau of Economic Analysis released data showing a sluggish annual growth rate of 1.8 percent for the quarter, down from a 3.1 percent annual rate in the final three months of 2010.

Despite that, the first-quarter estimate of gross domestic product was in line with the expectations of most analysts, who remained confident that economic growth will rebound through the rest of the year, albeit only modestly.

"We're still looking for about a 3 percent second-quarter growth rate. The 1.8 percent wasn't quite as bad as it looks," said David Wyss, the chief economist for the rating agency Standard & Poor's.

A dip in government defense spending, bad winter weather and other factors that slowed first-quarter growth are unlikely to repeat, Wyss said, adding that, "We still think we'll be back in the 3 percent to 3.5 percent range for the rest of the year."

Patrick Newport, an economist for forecaster IHS Global Insight, was similarly optimistic.

"I think part of it is that GDP numbers may be underestimated," he said, suggesting that the recent strong run of employment and manufacturing data point to a chance for an upward revision of Thursday's quarterly estimate once more data are processed over coming weeks.

Still, Newport hedged his outlook: "Going forward, we expect a modest recovery, not one where growth takes off and brings down the unemployment rate."

Over the last four quarters, the U.S. economy has grown at the average rate of 2.3 percent, not enough to significantly bring down the still-high unemployment rate, which stood at 8.8 percent last month. In the last three weeks, initial claims for unemployment have risen, prompting renewed concern about the sick economy.

"While the continued expansion is encouraging, clearly, faster growth is needed to replace the jobs lost in the downturn," Austan Goolsbee, the head of the White House Council of Economic Advisers, said in a statement.

Potential warning signs did pepper Thursday's data on the slowly expanding gross domestic product, the broadest statistical measure of the economy. There was a sharp slowdown in business fixed investment. It rose by 1.8 percent in the quarter, but that rate of growth is down sharply from the robust 7.7 percent growth rate during the final three months of 2010.

In addition, consumers were more frugal.

"Growth in personal consumption expenditures — the single largest component of GDP — decelerated to a 2.7 percent annualized rate from the previous quarter's 4.0 percent rate," Josh Bivens, an economist with the liberal Economic Policy Institute, said in an analysis.

Goolsbee saw a glass half-full in the numbers, however.

"Consumer spending rose 2.7 percent at an annual rate, boosted by a 2.9 percent increase in real disposable income that was due in part to the cut in payroll taxes. Equipment and software investment increased 11.6 percent," he said.

Business spending on equipment rose sharply in the quarter, driven in part by incentives in December's tax deal that renewed accelerated write-offs for business equipment.

Manufacturers were upbeat.

"For the manufacturing sector, the story continues to be the strong growth in durable goods, which were up 10.6 percent in the first quarter," Chad Moutray, the chief economist for the National Association of Manufacturers, wrote in an analysis of the GDP report.

Production of durable goods — which include refrigerators, cars and cell phones — added almost a full percentage point to the GDP in the first quarter, Moutray said.

On the negative side, however, residential investment fell 4.1 percent in the first quarter, after rising 3.3 percent in the final three months of 2010. Government's contribution to the economy fell by 5.2 percent from January through March, after falling 1.7 percent in the last three months of 2010. Trade also dragged down growth, as U.S. exports slowed and imports rose.

On Wednesday, Federal Reserve Chairman Ben Bernanke said he expected a weak first-quarter number because of rising oil prices, Japan's devastating earthquake and tsunami, and unrest in the Mideast and Northern Africa. Bad winter weather is also blamed.

The Fed revised its January forecast for economic growth, lowering the range to from 3.1 percent to 3.3 percent from earlier projections of 3.4 percent to 3.9 percent. A "moderate pace" of growth was the best the Fed would project for the rest of the year.

"Household spending and investment in equipment and software continue to expand, supporting the recovery. But nonresidential investment is still weak and the housing sector is depressed," Bernanke said. "In the labor market, overall conditions continue to improve gradually."

Oil remains a big shadow and a key variable to avoiding a double-dip recession.

"I don't think there's any cliff you walk over here, but when you start getting to the $150 (a barrel) range I'll start to panic," Wyss said. Oil currently sells in the $110-$120 per barrel range. "We're starting to see a little better employment, but you're fighting against some big head winds from energy costs and diminishing government stimulus."


GDP report


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