Economy Tepid growth may send a message to Congress Signs indicate economy will continue to expand, but slowly

By Christopher S. Rugaber and Paul Wiseman AP Economics Writers WASHINGTON (AP) -- The U.S. economy grew more slowly in the first three months of this year. Governments spent less, and businesses cut back on investment. But consumers spent at the fastest pace in more than a year. The result suggests that the economy will continue to expand, slowly but steadily. The Commerce Department estimated Friday that the economy grew at an annual rate of 2.2 percent in the January-March quarter, compared with a 3 percent rate in the final quarter of 2011. But growth is expected to rebound to around 3 percent for all of 2012 as stronger job growth spurs more consumer spending. Consumer spending accelerated to an annual rate of 2.9 percent in the first quarter. The strength came from a second robust quarter of growth in auto purchases. ---------- Here's what The Associated Press' reporters are finding: ---------- PRESSURE ON CONGRESS There may be a bright side to the weaker-than-expected growth in the January-March quarter: It could push Congress to reach a budget deal before the end of the year. Otherwise, automatic tax increases and spending cuts would send the nation over a "fiscal cliff" and drastically weaken economic growth, according to Bank of America. "Lawmakers need a reminder that they must reduce the fiscal drag," says Ryan Sweet, senior economist at Moody's Analytics. ---------- SAVING LESS OF WHAT WE EARN The increase in consumer spending comes with a caveat: People spent more in part because they socked away less. After-tax income grew at an annual rate of 2.8 percent from January through March. That was about the same pace as in the final three months of last year. But over the same period, the savings rate fell to 3.9 percent of after-tax income, down from 4.5 percent. Economists worry that people won't keep spending more unless their income grows. ---------- HOUSING PERKING UP One surprising bright spot in the first quarter's data: housing. Spending on home construction and renovations rose by the most in nearly two years. Some of that gain was likely fueled by the warm winter. Many construction projects are usually put on hold when building sites are covered with snow and ice. That didn't happen so much this winter. Housing is expected to contribute to growth this year for the first time since 2005. ---------- FIRST DRAFT OF HISTORY Friday's GDP report is just the initial estimate for first-quarter economic output. As is customary, the government will update its estimate in May and June. And then in July, the first-quarter numbers will be tweaked yet again. That's when the government will revise its estimates of growth from 2009 through the first quarter of this year. Last year, figures on incomes and saving were revised to show that Americans earned and saved more than previously estimated. Some economists think the current numbers on savings and income will also be revised higher later this year. ---------- BETTER THAN OVERSEAS As disappointing as the first-quarter numbers were, the U.S. economy still looks a lot stronger than most of the rest of the developed world. It's expected to grow at least 2.5 percent for the full year. By contrast, Britain's economy will only grow 0.8 percent and Japan's about 2 percent, according to forecasts from the International Monetary Fund. Things are even worse in Europe. The 17 countries that use the euro as their currency are expected to see growth shrink 0.3 percent. "Growth is an increasingly rare commodity in the global economy, but the US has got it," says Jason Conibear of Cambridge Mercantile, which specializes in trading currencies. ---------- NOT FAST ENOUGH This was the 11th quarter since the Great Recession officially ended in June 2009. The fastest rate of economic growth has been 3.9 percent in the first quarter of 2010. Normally, a much bigger bounce would follow a deep recession like the one the United States sank into in December 2007. When the economy emerged from the recession of 1981-1982, for instance, growth hit an 8 percent annual pace for four straight quarters in 1983 and 1984. ---------- THE WEIGHT OF GOVERNMENT Government spending cuts are weighing on the U.S. economy in a way that hasn't been seen in generations. Those cuts have reduced growth for six straight quarters -- the longest stretch since 1955. Reduced government spending subtracted 0.6 percentage point from the first quarter's growth. Fortunately, the drag may decline the rest of this year. Defense spending fell sharply in the past two quarters, which isn't likely to continue. And state tax revenue is recovering, closing budget gaps. "It's hard for the economy to accelerate when the government has its foot on the brake," said Joel Naroff, president of Naroff Economic Advisors. ---------- SPENDING WARMS UP A warm winter probably pulled some consumer spending into the January-March quarter that would normally have occurred this quarter. Auto sales, for example, accounted for nearly 30 percent of growth last quarter. Many car buyers probably came out earlier than usual. Without autos, growth would have been about 1.5 percent. "The second quarter won't have the advantage of unseasonably warm weather that likely goosed auto sales," says Beata Caranci, deputy chief economist at TD Economics. ---------- CONCERNS ABOUT HIRING The disappointing GDP figure adds to doubts about the pace of job creation. The 2.2 percent growth rate is consistent with a gain of only 100,000 jobs a month, according to Brad DeLong, an economist at the University of California, Berkeley. Yet employers added jobs at more than twice that rate from January through March. The pace might not be sustainable. What's more, the number of people applying for unemployment benefits has risen to a three-month high. And job growth fell sharply in March after surging in January and February. ---------- WILL FED INTERVENE? The Federal Reserve might have to rethink its forecasts and its policies, economists say. One economist thinks the Fed is now more likely to pursue a third round of bond purchases to try to push down long-term interest rates to stimulate the economy. It's "back on the table," says Bernard Baumohl of the Economic Outlook Group. ---------- WHY IT MATTERS The U.S. gross domestic product is the bedrock of the economy. It measures the output of all goods and services produced in the United States, from cars to electricity to manicures. GDP growth drives job creation, pay, corporate profits and stock prices. Published: Wed, May 2, 2012