The U.S. economy expanded less than forecast in the first quarter as a smaller contribution from inventories overshadowed the biggest gain in consumer spending in more than a year.
Gross domestic product, the value of all goods and services produced in the U.S., rose at a 2.2 percent annual rate after a 3 percent pace, Commerce Department figures showed yesterday in Washington. The median projection of economists surveyed by Bloomberg News called for a 2.5 percent gain. Government spending fell for a sixth straight quarter.
Job creation and income gains propelled sales at car dealerships and retailers like Target Corp., helping cushion the U.S. economy from weakness overseas. Further gains in consumer spending will depend on progress in reducing a jobless rate that has hovered above 8 percent since early 2009.
“This report came in less than expected but it was hardly a disaster,” said Joel Naroff, president of Naroff Economic Advisors Inc. in Holland, Pennsylvania. “Consumers hit the vehicle showrooms hard and consumption was strong.”
In addition to the 2.9 percent pickup in the rate of consumer purchases, the economy benefited from the biggest gain in homebuilding in two years and a jump in auto production. GDP was restrained by slower growth in business investment in equipment.
Stocks rose for a fourth straight day on stronger corporate earnings. The Standard & Poor’s 500 Index climbed 0.2 percent to 1,403.36 at the close of trading in New York. Treasuries were little changed, with the 10-year note yield at 1.93 percent at 4:34 p.m. in New York.
Another report yesterday showed consumer confidence rose to the highest in a year in April. The Thomson Reuters/University of Michigan’s final index of sentiment increased to 76.4 from 76.2 last month. The gauge was projected to hold at the 75.7 level initially reported earlier this month, according to the median forecast in a Bloomberg News survey of economists.
Consumer spending, which accounts for about 70 percent of the economy, contributed 2 percentage points to first-quarter growth, the most since the final three months of 2010. Cars sold last quarter at the fastest pace in four years, according to industry data.
“Auto sales softened at the end of the first quarter, and this rapid growth rate is unlikely to be repeated in the second quarter,” Ryan Wang, an economist at HSBC Securities USA Inc. in New York, said in a research note.
The U.S. is doing better than some other major economies. The U.K. slipped into its first double-dip recession since the 1970s, figures showed this week. In Japan and Germany, gross domestic product dropped in the final three months of 2011, while China, the world’s second-largest economy, is also cooling.
“The U.S. is where the strength is,” Sandy Cutler, chairman and chief executive officer at Eaton Corp., said on an April 23 conference call with analysts.
The Cleveland-based company predicted its U.S. markets, including electrical, hydraulics, aerospace, truck and automotive, will rise 9 percent this year, up from an earlier estimate of 6 percent. For its markets abroad, Eaton reduced its growth forecast to 2 percent from 4 percent, Cutler said.
The GDP data underscore the view of Federal Reserve officials who this week said they expect “moderate” growth as they repeated borrowing costs are likely to stay low at least through late 2014.
Jobs and the economy are a central theme in political sparring between President Barack Obama and Republican challenger Mitt Romney.
Obama’s job approval rating reached 50 percent in a Gallup Daily tracking poll for April 21-23. The telephone survey of 1,534 adults has a margin of error of plus or minus 3 percentage points. The 50 percent approval mark is notable because all incumbent presidents since Dwight Eisenhower at or above the level at the time of the election were re-elected, according to Gallup.
A stabilization in housing also aided first-quarter GDP growth. Residential construction increased at a 19.1 percent rate, the fastest in almost two years.
A job market that’s improved since the end of 2011 is underpinning demand. Employers increased payrolls by 635,000 from January through March, the biggest quarterly gain since the first three months of 2006, data from the Labor Department show. At the same time, the jobless rate has been above 8 percent for the past three years.
“People have been spending -- whether they continue to spend is a function of what happens with the labor market,” said Joseph Lavorgna, chief economist at Deutsche Bank Securities Inc. in New York.
Americans dipped into savings as they increased their purchases, yesterday’s data showed. Disposable income after inflation rose 0.4 percent in the first quarter following a 1.7 percent gain. The saving rate from January through March eased to 3.9 percent from 4.5 percent.
The drop “raises the question, ‘How long can we continue to consume by saving less?’” said Mohamed El-Erian, chief executive officer of Pacific Investment Management Co., the world’s biggest manager of bond funds.
Yesterday’s University of Michigan report also showed that Americans were more pessimistic about their finances than in March. Views on finances weakened across all income groups, with 28 percent saying they were improved, down from 34 percent who said so last month.
Retail purchases advanced at an average rate of 0.8 percent in the first quarter, the fastest in a year, as stores offered discounts and shoppers stocked up early on spring gear. Same-store sales at Target, the second-largest U.S. discount chain, and Gap Inc., the biggest U.S. apparel chain, beat the average estimate of analysts.
Connie Zheng, 26, was promoted in January at North of Nine, a technology public relations agency based in San Francisco. The promotion came with a raise, allowing her to celebrate with the purchase of $150 purse and a new Apple Inc. iPad.
The economy “feels much better than a year ago,” Zheng said. “I was looking for a job in 2009. That was really hard, looking for a job back then. Since, there’s been a lot more hiring going on and things generally feel better.”
Unseasonably mild temperatures may have also spurred spending on everything from homes to restaurant meals. The January-to-March period was the warmest first quarter on records going back to 1895, according to the National Oceanic and Atmospheric Administration.
Small businesses such as Spreadshirt Inc. are also benefiting from the pickup in consumption. The print-on-demand t-shirt company had a 108 percent increase in sales in the first quarter from a year ago. The company, which is based in Leipzig, Germany, is opening a factory in Las Vegas and will add 90 employees to its current U.S. staff of 150, according to Vice President Mark Venezia.
Sales have been “remarkable,” Venezia said. “With this growth we’re looking at expansion into other countries. We’re investing in more equipment.”
Business investment cooled. Corporate spending on equipment and software climbed at a 1.7 percent pace, the weakest in almost three years, after advancing at a 7.5 percent rate in the previous quarter. It contributed 0.1 percentage point to growth.
Rising auto and industrial demand will keep factories busy even as manufacturing, a driver of the economic rebound, cools to a more sustainable pace, economists said. 3M Co., the maker of fuel system tune-up kits and Post-it Notes, reported a first-quarter profit that beat analysts’ estimates.
Texas Instruments Inc. this week forecast second-quarter earnings that may top some analysts’ estimates, and Chief Executive Officer Rich Templeton in a statement referred to the “breadth of increased orders across geographical regions and markets.”
A smaller boost came from inventories, which contributed 0.6 percentage point to GDP growth after 1.8 percentage points at the end of 2011. Stockpiles were rebuilt at a $69.5 billion annual pace, after a fourth-quarter rate of $52.2 billion.
Other areas of the economy that struggled include spending by state and local governments, which decreased at a 1.2 percent annual rate, after a 2.2 percent drop. Outlays by federal agencies declined 5.6 percent. National defense spending slumped 8.1 percent, following a 12.1 percent decrease the prior quarter.
A measure of inflation that is tied to consumer spending and strips out food and energy costs, climbed at a 2.1 percent annual pace compared with 1.3 percent in the prior quarter. Fed officials have defined their inflation target as 2 percent a year.