By CATHERINE RAMPELL
Published: April 26, 2013
Economic activity picked up in the first quarter of this year, with output expanding at an annualized pace of 2.5 percent, according to a Commerce Department report released on Friday. The number was a welcome improvement from the unusually sluggish growth at the end of 2012, but significant government spending cuts and the pinch from recent tax increases look likely to keep the economy in stall speed in the months ahead.
“We just have not been able to hit escape velocity, to get us growing fast enough to make up for the ground we lost during the recession,” said Steve Blitz, director and chief economist at ITG Investment Research. He forecasts growth around 2 to 2.5 percent for the rest of the year, which is slower than the economy’s long-term average. “Government spending is clearly a negative, but the reason why it’s such a strong negative is because there’s nothing else in the private sector really driving things forward.”
Economists noted that even the decent growth in the first quarter was probably somewhat overstated, with some of the improvement caused mostly by a rebound from the bare 0.4 annual growth rate in the fourth quarter of 2012. Businesses drew down their back-room inventories at the end of last year, so they needed to replenish them at the start of 2013. But that stockroom rebalancing appears to have restored inventories to acceptable levels and probably will not drive much more business spending growth later in the year.
Similarly, consumer spending was stronger in the first quarter, growing at its fastest pace since late 2010. But Mr. Blitz discounted even that apparently good news because so much of the extra spending was in housing and utility costs, which could have been driven by unusually cold weather.
It also seems unlikely that consumers will spend as freely in the months ahead, economists said. Consumer sentiment and retailer reports suggest that households are starting to feel squeezed from the lapse of the two-year payroll tax holiday. That meant the Social Security tax rate rose 2 percentage points in January, adding about $700 a year to the typical worker’s tax bill.
Wage stagnation may also put a crimp in spending. Much of the job growth, after all, has been concentrated in relatively low-paying areas like food services and retail, and household incomes have been more or less flat since May, according to Sentier Research.
On the bright side, gas prices have fallen sharply in the last two months, which means households have more money free for other kinds of purchases.
The most immediate concern for many businesses and consumers is the shrinking government.