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Anjelica Tan/MEDILL

Economic growth slowed in the first quarter of 2011. Government cut spending to deal with the growing deficit, while consumers faced high energy and food prices.

U.S. growth slows in first quarter

by Anjelica Tan
May 26, 2011

The nation’s economy hit a speed bump in the first quarter of 2011. Real gross domestic product increased 1.8 percent, a significant slowdown in growth from the fourth quarter when GDP rose 3.1 percent on an annualized basis. This was the second estimate released by the Bureau of Economic Analysis. Economists surveyed by Dow Jones Newswires were expecting a 2.2 percent increase.

“One factor to look at is the impact that is emerging from the earthquake in Japan,” said Adolfo Laurenti, deputy chief economist at Mesirow Financial Holdings Inc. in Chicago. “It’s been very disruptive for the auto industry because a lot of parts are built in Japan, and the earthquake has been causing a slowdown in exports.”

Indeed, growth in consumer spending on motor vehicles and parts fell to 9.7 percent in the first quarter versus a rise of 49.1 percent in the fourth quarter, which reflects the highest rate in the category since a 75.7 percent increase in the last quarter of 2001.

“I wouldn’t attribute too much to Japan, but I would pay attention to other factors like energy and what the government is doing and even the weather,” said Samuel Kortum, an economist at the University of Chicago.

Overall consumer spending grew 2.2 percent in the first quarter compared with an increase of 4.0 percent in the previous quarter. The growth rate is a downward revision from the bureau’s initial estimate of a 2.7 percent rise in personal consumption. Higher oil and food prices contributed to the drawback in spending.

Severe weather negatively affected building construction as the spring season began, contributing to a decrease in spending on commercial and industrial structures, which dropped 16.8 percent, compared with a 7.6 percent increase in the fourth quarter. Residential investment fell 3.3 percent after rising by the same amount in the last quarter of 2010.

The government, dealing with its looming debt problem, cut spending in the first quarter. Federal expenditures decreased 7.9 percent compared with a decline of only 0.3 percent in the previous quarter. National defense spending dropped 11.7 percent. State and local governments reduced spending 3.2 percent after lowering expenditures 2.6 percent in the previous quarter.

“There is a slowdown in government spending, but this isn’t a surprise because of problems with the budget,” Laurenti said. “Government spending partially offset some increases in business spending, so there is some growth in the private sector.”

Businesses increased private inventories by $52.2 billion in the first quarter following a rise of $16.2 billion in the fourth quarter. Firms also boosted exports of goods and services, which went up 9.2 percent following an 8.6 percent increase in the previous quarter.

Growth in corporate profits slowed slightly, increasing $21.9 billion in the first quarter versus $38.2 billion in the fourth quarter. Higher corporate taxes kicked in, rising $33.6 billion in contrast to a $1.3 billion decline in the previous quarter.

The final estimate for first-quarter GDP will be released June 24.