High energy prices held back economic growth in 1st quarter

WASHINGTON -- High gasoline prices, government budget cuts and weaker-than-expected consumer spending caused the economy to grow only weakly in the first three months of the year.

The Commerce Department estimated Thursday that the economy grew at an annual rate of 1.8 percent in the January-March quarter. That was the same as its first estimate a month ago.

Consumer spending grew at just half the rate of the previous quarter. And a surge in imports widened the U.S. trade deficit.

Most economists think the economy is growing only slightly better in the current April-June quarter. Consumers remain squeezed by gas prices, scant pay increases and a depressed housing market.

Analysts estimate that growth has accelerated slightly to around 2.5 percent in the current April-June quarter. For the entire year, they think the economy will grow around 3 percent. That would be little changed from the 2.9 percent growth in 2010.

Growth is expected to improve modestly in the second half of 2011 as stepped-up hiring helps stimulate consumer and business spending. Companies are also benefiting this year from a tax break that lets profitable businesses write off large capital expenditures right away rather than gradually.

But economists caution that their brighter outlook could be derailed if oil prices head higher or if financial markets are jolted by Europe's debt crisis or a failure by Congress to raise the government's borrowing authority this summer.

"I think consumers will hang on and start to do their part to lift the economy," said Mark Zandi, chief economist at Moody's Analytics. "The job market is improving, and more job growth means more income growth and that will help spending."

Still, a Labor Department report Thursday suggested that the job market remains sluggish. The government said more people applied for unemployment benefits last week. It was the first increase in three weeks.

The number of people seeking unemployment benefits rose by 10,000 to a seasonally adjusted 424,000. Applications are above the 375,000 level that's consistent with sustainable job growth. Applications peaked at 659,000 during the recession. Employers stepped up hiring this spring, but some economists worry that rising applications indicate hiring is slowing.

In recent weeks, global stock markets have been weighed down by concerns about the pace of the U.S. recovery and worries over Europe's debt crisis, particularly whether Greece will have to restructure its debts.

"The latest U.S. data definitely fit into a growing pattern of softer-than-expected reports," said Alan Ruskin, an analyst at Deutsche Bank.

Economists had been more optimistic when the year began. They assumed that a cut in workers' Social Security taxes, which raised take-home pay, would boost consumer spending.

But political upheaval in the Middle East and North Africa sent energy prices soaring. The result was that consumers had to pay more for gas, leaving less money to spend on other items.

The government's revised estimate for gross domestic product -- the economy's total output of goods and services -- showed consumer spending growing at an annual rate of just 2.2 percent. That's sharply down from an initial estimate of 2.7 percent.

Consumer spending, which accounts for 70 percent of economic activity, had grown at a much faster 4 percent rate in the October-December period.

The GDP revision showed that the government sector is dragging on growth. Government spending fell at an annual rate of 5.1 percent. Federal and state and local governments have cut spending to battle budget deficits.

Economists expect government spending to remain weak. They note that Congress will likely slash spending to try to shrink $1 trillion-plus budget deficits.

Exports grew faster than previously estimated last quarter -- a brisk 9.2 percent rate. But imports grew even faster -- at a 9.5 percent rate -- causing the U.S. trade deficit to widen. A higher trade deficit subtracts from growth.

Spending by companies on equipment and software grew at a solid rate of 11.6 percent. Economists expect that to continue as companies take advantage of one-year tax write-offs for such purchases.

David Wyss, chief economist at Standard & Poor's in New York, said he thinks the economy will grow at an annual rate of 2.5 percent in the current quarter. Wyss said he expects growth to strengthen slightly to around 3 percent in the second half of this year.

In part, that's because the U.S. manufacturing supply disruptions caused by the Japanese earthquake and nuclear crisis in March should ease. And auto plants and other factories get back to full production.

Still, analysts think the economy may not be able to exceed 3 percent growth for the full year.

"There are just too many headwinds for the economy to fight against at the moment," Wyss said.