GDP grows 3.2% in first quarter, helped by consumer spending
With consumers taking more of the spending baton from the federal government, the economy continued its modest recovery in the first three months of the year. But economists warned that there still is a long race ahead to restoring the nation from the deep recession.
The biggest increase in consumer spending in three years helped the economy grow 3.2% in the first quarter, the Commerce Department reported Friday, offsetting the declining effect of Washington’s stimulus efforts.
The recovery appears to have taken hold firmly, with three straight quarters of expansion. But economists said growth would be uneven for months as businesses still struggling with the fallout from the financial crisis remain hesitant to hire new workers.
“It’s a recovery, but by any standard it’s still a muted recovery,” said Diane Swonk, chief economist at Mesirow Financial in Chicago. “At the end of the day, none of this really matters unless we can get the employment machine going, which is coming, but very slowly.”
The annualized rate of growth of gross domestic product — a measure of the nation’s overall economic output — was down from the 5.6% rate of last year’s final three months. But that was expected because the effect of the federal government’s stimulus policies peaked during that period.
Mark Zandi, chief economist at Moody’s Economy.com, said the new data showed the recovery “is slowly gaining traction.”
“It isn’t enough, though, to convince me that we’re off and running,” he said. “This is good, solid growth, but not enough growth to get businesses to hire sufficiently to bring down unemployment.”
The modest growth rate still represents a dramatic improvement over the same period last year. At the bottom of the recession, the U.S. economy shrank 6.4% in the first quarter of 2009.
President Obama called Friday’s news “an important milepost on our road to recovery.”
“After the single biggest economic crisis in our lifetimes, we’re heading in the right direction,” he said at the White House.
Even after three straight quarters of economic growth, the recession still has not been declared officially over.
The National Bureau of Economic Research, which determines the lengths of business cycles, said this month that it “would be premature” to set a date marking the end of the recession and the start of an economic expansion. A major reason for that decision was the high unemployment rate.
Job growth returned in March, with the economy creating 162,000 jobs, but the national unemployment rate remained at 9.7%. The rate is worse in many states, including California, which reached a new high of 12.6% in March.
“The signs of life in our economy are little comfort to the millions of families and small businesses asking ‘Where are the jobs?’ ” said House Minority Leader John A. Boehner (R-Ohio).
Obama acknowledged that Friday, promising to continue efforts to encourage job creation.
“For millions of Americans — our friends, neighbors and fellow citizens ready and willing to get back to work — ‘You’re hired’ is the only economic news they’re waiting to hear,” he said.
First-quarter growth was built mostly on consumer spending, which increased 3.6%, the largest in three years. Reflecting that growing demand, businesses continued to boost inventories, also fueling growth.
“Consumer spending has come out of the deep freeze during the recession,” said economist Sung Won Sohn, a professor at Cal State Channel Islands in Camarillo. The home buyer tax credits, which expired Friday, added to that spending.
But housing continued to be a drag on the economy, as were state and local governments struggling to deal with declining revenues and budget shortfalls. Spending by state and local governments dropped 3.8% in the first quarter, the largest decrease since 1981.
Congressional Democrats are pushing for $75 billion in new aid to prevent a wave of local government layoffs. Zandi said such spending was important to keep the recovery from stalling.
“If policymakers remain aggressive in providing support to the economy, odds are very high by this point next year we’ll be in a full-blown economic expansion with falling unemployment,” he said.
“Everything hinges on businesses starting to hire,” Zandi said, “and everything is coming into place for them to hire. But until they do, I don’t think we can exhale.”
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