Economy logs solid 3.2 percent growth in Q1 as consumers boost spending by most in 3 years

Consumer rebound gives economy solid boost in Q1

WASHINGTON — The economy grew at a solid 3.2 percent pace during the first quarter of this year as consumers boosted their spending by the most in three years.

The Commerce Department’s initial estimate of the economy’s performance in the January-to-March quarter, released Friday, provided more evidence that the economy is strengthening. It marked the third straight quarterly gain as the United States heals from the longest and deepest recession since the 1930s. Still, growth was weaker than in the fourth quarter of last year, when the economy grew at 5.6 percent.

Consumers rebounded and powered the first-quarter’s growth. They increased their spending at a 3.6 percent pace, the strongest showing since early 2007 — before the economy tipped into a recession. That marked a big improvement from the fourth quarter when consumer spending grew at a lackluster 1.6 percent pace.

In the first quarter, consumers spent more on things like home furnishings and household appliances, recreational goods and vehicles, clothing, and going out to bars and restaurants.

Even though consumers aren’t spending as freely as they normally do early in strong economic recoveries, they are spending sufficiently to keep the economy expanding.

Looking ahead, analysts believe consumers will be wary of stepping up spending much further. The unemployment rate is high at 9.7 percent and is expected to stay elevated in the months ahead. Sluggish income growth and problems getting loans could restrain shoppers’ appetite to spend, they say.

“The economy is moving ahead at a decent pace. That’s good. But there are headwinds out there for consumers that probably will restrain growth going forward. Are those headwinds going to disappear any time soon? My guess is no,” said Joel Naroff, president of Naroff Economic Advisors. He predicts consumer spending will slow in the current April-to-June quarter to about a 2 percent pace.

Just 21 percent of Americans consider the economy in good condition, according to an Associated Press-GfK Poll conducted April 7-12.

Growth would have to equal 5 percent for all of 2010 just to lower the average jobless rate for the year by 1 percentage point.

The outlook for moderate growth this year means unemployment will stay high — in the 9 percent range — by the November congressional elections. The prospects for high joblessness are a political liability for incumbent Democrats and Republicans.

The first quarter’s reading on gross domestic product was a tad shy of the 3.4 percent growth rate economists were forecasting. GDP measures the value of all goods and services — from machinery to manicures — produced within the United States. It is the best barometer of the nation’s economic health.

Businesses did their part to help the economy grow in the first quarter. Spending by the federal government helped, too.

Spending by businesses on equipment and software rose at a brisk 13.4 percent pace, following an even bigger 19 percent growth rate in the fourth quarter.

The federal government increased spending at a 1.4 percent pace, after being flat in the prior quarter.

Companies started to restock inventories shrunken during the recession, helping boost factory production and GDP.

Exports grew at a slower pace in the first quarter, while imports rose much faster — reflecting stronger demand by U.S. consumers. That meant the nation’s trade deficit acted as a small drag to GDP in the first quarter. Slower export growth probably reflects less demand coming from major trading partners in Europe because of the debt crisis there, analysts say.

Problems in the real estate market slowed economic activity.

Builders once again trimmed spending on housing projects, following two quarterly gains. Spending on commercial real estate ventures plunged at a 14 percent pace, the seventh straight quarterly decline.

And state and local governments continued to trim spending, a move some analysts expect to continue for years.

Despite pockets of weakness, multiple signals suggest the U.S. economy has turned a corner.

Employers are creating jobs again — a net total of 162,000 jobs in March, the most in three years. Manufacturers are boosting production. Consumer confidence is higher.

And a rising number of companies — from Ford, Caterpillar and Whirlpool to UPS, Estee Lauder and Royal Caribbean Cruises — are seeing profits grow. General Electric says the “clouds are breaking” after having suffered one of its worst years in 2009.

By his best bet, Federal Reserve Chairman Ben Bernanke says the economy will log moderate growth.

Economists in a recent AP Economy Survey predict the economy will pick up some speed, growing at a rate of 3.7 percent in the April-to-June quarter.

For 2010 as a whole, economists in the AP survey predict the economy will grow 3.1 percent. That’s an improvement from the 2.4 percent decline in 2009, the worst since 1946. But much stronger growth in the 5 percent range is needed for a full year just to drive down the unemployment rate by just 1 percentage point.