Economy speeds up on consumer spending

By MARTIN CRUTSINGER
AP Economics Writer

WASHINGTON (AP) -- U.S. economic growth accelerated to an annual rate of 2.5 percent from January through March, buoyed by the strongest consumer spending in more than two years. Government spending fell, though, and tax increases and federal budget cuts could slow growth later this year.

The Commerce Department said Friday that the economy rebounded from an anemic 0.4 percent annual growth rate in the October-December quarter. Much of the gain reflected a jump in consumer spending, which rose at an annual rate of 3.2 percent. That was the biggest such jump since the end of 2010.

Growth was also helped by businesses, which responded to the greater demand by rebuilding their stockpiles. And home construction rose further.

But government spending fell at a 4.1 percent rate, led by another deep cut in defense spending. The decline kept last quarter's increase in economic growth below expectations of a 3 percent rate or more.

Many economists say they think growth as measured by the gross domestic product is slowing in the April-June quarter to an annual rate of just 2 percent. Most foresee growth remaining around that subpar level for the rest of the year.

GDP is the broadest gauge of the economy's health. It measures the total output of goods and services produced in the United States, from haircuts and hamburgers to airplanes and automobiles.

Across-the-board government spending cuts, which began taking effect March 1, have forced federal agencies to furlough workers, reduced spending on public projects and made businesses more nervous about investing and hiring.

Consumers' take-home pay has also fallen because President Barack Obama and Congress allowed a Social Security tax cut to expire. A person earning $50,000 a year has about $1,000 less to spend this year. A household with two high-paid workers has up to $4,500 less. Consumers' take-home pay is crucial to the economy because their spending drives roughly 70 percent of growth.

Americans appeared to shrug off the tax increase at the start of the year. They spent more in January and February, helped by a stronger job market. In part, that's why growth is expected to be solid in the first quarter.

But hiring slowed sharply in March. And consumers spent less at retail businesses, a sign that many were starting to feel the tax increase. Economists expect spending to stay weak in the second quarter as consumers adjust to their smaller paychecks.

Ben Herzon, an economist at Macroeconomics Advisers, said the tax increases could shave roughly 1 percentage point from growth this year. He also expects the government spending cuts to reduce growth by about 0.6 percentage point.

The drop in government spending cut growth in the January-March quarter by 0.8 percentage point. Three-fourths of that decline came from defense spending.

Income growth slowed sharply after a big surge in the final three months of 2012. The fourth-quarter gain had reflected a rush to pay dividends and make bonus payments before higher tax rates took effect on Jan. 1. Incomes were also held back in the first three months by the increase in Social Security taxes. The big jump in consumer spending, along with slower income growth, meant that the saving rate fell to 2.6 percent of after-tax income in the first quarter. That was down from 4.7 percent in the fourth quarter. The first-quarter growth figures will be revised twice more based on more complete data.