The Borneo Post

US economy stuck in the muck, plunges below analysts’ expectatio­ns

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WASHINGTON: We’re still stuck in the muck.

That’s the conclusion to draw from the new report on gross domestic product (GDP). The US economy grew at a 2.5 per cent annual rate in the first three months of the year, which was an improvemen­t from the weak 0.4 per cent of the final months of 2012.

But last Friday’s report was nearly a percentage point below analysts’ expectatio­ns, and for the last six months, number averages to only a 1.45 per cent annual rate of growth.

The report should scratch any thought that our economy is heading into “escape velocity” and breaking into a higher, selfreinfo­rcing trajectory of growth. That had appeared to be the case in the first couple of months of the year. But it just isn’t so.

We’re muddling along at basically the same pace we’ve been at for nearly four straight years of this dismal recovery, with growth too slow to make up the lost economic ground from the 2008 to 2009 recession.

The report details this stuckin-neutral economy. It’s not without bright spots, but there aren’t enough of them, and they aren’t bright enough to make up for the forces dragging the recovery, most significan­tly a drop in government spending.

The biggest culprit in the weak report was the government sector, which fell at a 4.1 per cent rate, after a seven per cent pace of decline in the fourth quarter. The fall was universal — at the federal, state and local levels. The US government is in pullback mode, and whatever one thinks about reducing the size government in the long run, for now it is unequivoca­lly the villain in slowing growth. If there’d been no change in government spending over the last six months, GDP growth would have averaged a respectabl­e 2.55 per cent, not the current soft 1.45 per cent.

There’s also little sign that the private sector is expanding aggressive­ly to make up the difference.

Business investment in structures (think factories and office building) fell in the first quarter, while spending on equipment and software rose at a three per cent annual rate, far below the double- digit pace that was common earlier in the recovery.

The best news in from the report is that Americans spent more these first three months of the year. Personal spending rose at a 3.2 percent annual rate, the strongest since the end of 2010, with particular­ly good showings in durable goods (such as cars and furniture) and services (everything from restaurant meals to health care). That spending could go down in future quarters, as Americans see their paychecks shrink under the higher payroll taxes. But for now, consumers aren’t the problem.

Housing, on the other hand, which many have hoped will be the big driver of growth in 2013, is expanding, but not fast enough. Residentia­l investment rose at a 12.6 per cent rate in the first quarter, but that is coming off a very low starting point, and is slower than the 17.6 per cent growth rate of the fourth. This housing “boom” added only 0.3 percentage points to the overall rate of GDP growth. The improvemen­t is welcome, but builders need to work more than they did in the first quarter of 2013.

Many see these first months of 2013 as a face- off between a government that’s retrenchin­g and a housing sector that’s expanding. In the first quarter, government unequivoca­lly took dominance, subtractin­g 0.8 percentage points from growth, as housing added only a 0.3 percentage point.

So, there you have it. Economics writers are always looking for signs of change, and we excitedly (sometimes too eagerly) leap to identify a new trend in the economy. But this time there isn’t one.

Government is contractin­g, as it has in 10 of the last 11 quarters. The private sector is improving quickly enough to counteract that contractio­n and ensure that GDP growth is expanding — but not fast enough to spur the robust recovery that the country sorely needs. —WP-Bloomberg

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