US GDP lower than expected as austerity bites

A drop in government spending dragged more on the US economy than initially thought in the first three months of the year, a sign of increasing pain from Washington’s austerity drive.

Another report today showed the number of new jobless claims rose last week, and together the data reinforced the view that the US economy may be entering yet another soft patch.

Gross domestic product, a measure of the country’s total economic output, expanded at a 2.4 per cent annual rate during the first quarter, down a tenth of a point from an initial estimate, the Commerce Department said today. Analysts had forecast a 2.5 per cent gain.

That is much faster than the prior quarter’s pace, but likely still too weak to fuel faster improvements in the labor market.

“We are dramatically under-spending in Washington,” said Michael Strauss, a market strategist at Commonfund in Wilton, Connecticut.

Investors took the data as a sign of weakness in the economy, and futures for US stock indexes trimmed gains while yields on US government debt fell slightly.

Growth in the first quarter was held back as government spending fell across all levels of government and as businesses outside the farm sector stocked their shelves at a slower pace.

Washington has been tightening its belt for several years but ramped up austerity measures in 2013, hiking taxes in January and slashing the federal budget in March.

Still, economic growth has been surprisingly resilient, supported by the Federal Reserve’s low interest rate policies which have helped families buy homes and cars.

Today’s data could add to the case that the economy still needs a lot of monetary stimulus, although policymakers at the central bank have been talking up the possibility of easing back on their bond buying program this year.

Most economists expect growth will slow around the middle of 2013 as budget cuts bite across the public sector. But growth is seen picking up by year end, propelled by consumer spending and an apparently entrenched housing market recovery.

Government spending has now fallen sharply in two straight quarters and economists believe agencies have pulled back in anticipation of budget cuts that were initially due to begin in January but which took effect in March.

In the first quarter, government spending dropped at a 4.9 per cent annual rate, faster than the 4.1 per cent rate initially estimated. Spending fell at federal, state and local government offices, though the majority of the downward revision in Today’s report came at the state and local level.

Washington has been trimming deficits for several years as programs enacted to fight an economic crisis have wound down. This year, the federal government is on track to slash its budget shortfall by the most in nearly a half century.

In the first quarter, the drag from government and inventories was partially offset by an upward revision to consumer spending, which rose at a 3.4 per cent annual rate, up two tenths of a point from the government’s previous estimate.

However, a cloud hung over that category, as most of the upward revision was due to higher sales of gasoline. Higher prices at the pump are a burden on consumers, leaving them less money to spend on other things. Consumer spending accounts for more than two-thirds of US economic activity.

Excluding the volatile inventories component, GDP rose at an upwardly revised 1.8 percent rate, slightly higher than analysts had forecast.

A separate report showed the number of Americans filing new claims for unemployment benefits unexpectedly rose last week.

Initial claims for state unemployment benefits increased 10,000 to a seasonally adjusted 354,000, above analysts’ expectations, Labor Department data showed.

Reuters