Economy in U.S. Grows Less-Than-Forecast 1.8% as Government Spending Drops

The U.S. economy slowed more than forecast in the first quarter as government spending declined by the most since 1983 and household purchases cooled.

Gross domestic product rose at a 1.8 percent annual rate from January through March after a 3.1 percent pace in the final three months of 2010, the Commerce Department said today in Washington. Economists projected 2 percent growth, according to the median estimate in a Bloomberg News survey. Another report showed rising gasoline prices depressed consumer confidence last week.

To spur the economy, Federal Reserve Chairman Ben S. Bernanke said yesterday the central bank would maintain record monetary stimulus after ending large-scale bond purchases in June. Job growth and income gains suggest consumers will keep spending in the face of higher fuel costs.

“We’ve sputtered a bit here,” said Sam Bullard, a senior economist at Wells Fargo Securities LLC in Charlotte, North Carolina, who accurately forecast first-quarter growth. “Consumers are going to continue to spend. Growth should pick up toward the 3 percent level” later this year, he said.

Stocks rose, sending the Standard & Poor’s 500 Index to the highest levels since 2008, as better-than-estimated corporate earnings tempered concern over slowing growth. The S&P 500 climbed 0.4 percent to 1,360.48 at 4 p.m. in New York.

Consumer confidence in the U.S. fell last week for the first time in a month. The Bloomberg Consumer Comfort Index decreased to minus 45.1 in the period ended April 24, the lowest level since the end of March, from minus 42.6. Measures of personal finances and buying climate dropped.

Jobless Claims

New applications for jobless benefits unexpectedly rose last week to the highest level in three months, a report from the Labor Department showed. Unemployment insurance claims jumped by 25,000 to 429,000. The government anticipates a drop in unadjusted claims during the week leading up to the Easter holiday, something that didn’t happen this year, a Labor Department spokesman said.

GDP growth estimates from 80 economists surveyed by Bloomberg ranged from 0.5 percent to 3.5 percent. The first- quarter pace was the slowest since April through June of last year. For all of 2010, the world’s largest economy expanded 2.9 percent, the most in five years, after shrinking 2.6 percent in 2009.

Slower first-quarter growth explains why Fed policy makers trimmed their 2011 forecasts to a range of 3.1 percent to 3.3 percent, according to its latest so-called central tendency, released yesterday. In January, central bankers projected 3.4 percent to 3.9 percent expansion.

Slowdown ‘Transitory’

“I would say roughly most of the slowdown in the first quarter is viewed by most on the committee as transitory,” Bernanke said at a news conference in Washington following the central bank’s policy meeting yesterday.

Household purchases, which account for about 70 percent of the economy, rose at a 2.7 percent pace last quarter after a 4 percent gain in the final three months of 2010.

The increase in consumer spending from January through March compared with a 2 percent median forecast in the Bloomberg survey. Purchases added 1.91 percentage points to growth.

Government purchases fell at a 5.2 percent annual rate after a 1.7 percent decrease in the fourth quarter. National defense spending dropped at an 11.7 percent pace, the most since 2005. Federal government spending declined the most in 11 years.

Outlays Frozen

Defense spending in first quarter was held down by Congress’ failure to pass an annual appropriations bill for the current fiscal year. Because it was operating under a stopgap bill, the Defense Department’s outlays were frozen at fiscal 2010 levels. Budget rules also prevented the Pentagon from starting new procurement programs or in some cases extending or revising programs.

Orders were affected at Waltham, Massachusetts-based Raytheon Co., Chief Executive Officer Bill Swanson said on a conference call today. In the first quarter, Raytheon, the world’s largest maker of missiles, didn’t get about $500 million of bookings and about $200 million of sales, he said.

Residential construction fell at a 4.1 percent rate, while the trade deficit subtracted 0.1 percentage point from GDP, today’s report showed.

A report from the National Association of Realtors today showed an increase in the number of Americans signing contracts to buy previously owned homes. The index of pending home resales climbed 5.1 percent after a revised 0.7 percent increase the prior month, the group said.

Forefront of Recovery

Manufacturing industries, which account for 11 percent of the economy, are likely to remain at the forefront of the recovery on growing demand from abroad and the need to replenish stockpiles.

Inventories last quarter were built up at a $43.8 billion pace, compared with a $16.2 billion rate in the fourth quarter. Excluding inventories, the economy climbed at a 0.8 percent annual rate from January through March, the slowest since the third quarter of 2009.

Spending on equipment and software climbed at an 11.6 percent annual rate last quarter, up from 7.7 percent the previous three months.

“After a period of widely fluctuating demand in late 2008 through last year, we anticipate that 2011 will be the beginning of a period of sustained growth in our truck engine markets in the U.S.,” Thomas Linebarger, chief operating officer of Cummins Inc. (CMI), said on an April 26 teleconference.

Diesel-Engine Maker

The Columbus, Indiana-based maker of diesel engines projects 2011 sales to be up 30 percent from last year, compared with a previous forecast for a 20 percent gain.

The Fed’s preferred price gauge, which is tied to consumer spending and strips out food and energy costs, climbed to a 1.5 percent annual pace, today’s GDP report showed. The Fed’s longer-term projection for inflation is a range of 1.7 percent to 2 percent. Rising oil and food costs may push up the prices of other goods and services.

To contact the reporter on this story: Timothy R. Homan in Washington at thoman1@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz in Washington at cwellisz@bloomberg.net

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