The Commerce Department on Thursday lowered its estimate for January-March growth from an initial estimate of 2.2 per cent. The downward revision was largely because consumers and governments spent less than first estimated, businesses restocked more slowly, and the U.S. trade deficit grew sharply.
Analysts believe the economy is growing at a slightly faster rate this spring. They estimate growth at an annual rate of between 2 per cent and 2.5 per cent in the April-June quarter. Many expect the economy will maintain that pace for all of 2012, an improvement from last year's 1.7 per cent growth.
Still, growth of 2.5 per cent is typically enough just to keep pace with population changes. Most economists say it takes almost twice as much growth to lower the unemployment rate by 1 percentage point over a year.
The government offers three estimates for gross domestic product. GDP is the output of all goods and services, which includes everything from haircuts and coffee to airplanes and appliances.
A rising trade deficit slows growth because the country is spending more on foreign-made products than it is taking in from sales of U.S.-made goods. Less restocking means companies ordered fewer goods, which decreases factory production and weighs on growth.
Consumer spending grew at an annual rate of 2.7 per cent in the first quarter. While that was the fastest pace since the end of 2010, it was down from an initial estimate of 2.9 per cent. A key reason for the revision was fewer auto purchases.
Government spending at all levels fell at a 3.9 per cent annual rate. That's much more than the 3.0 per cent decline first estimated. It was the sixth straight quarter that government spending has declined, reflecting budget constraints at the federal, state and local levels.
Still, Jennifer Lee, senior economist at BMO Capital Markets, pointed out that a number of components were revised higher. Among them was housing, which is beginning to show signs of a modest recovery after a prolonged period of weakness.
Economists expect growth to pick up slightly this spring because of steady job growth and lower gas prices. Both allow consumers to spend more freely. Consumer spending drives 70 per cent of economic activity.
And more demand from consumers leads businesses to step up restocking, which also boosts growth.
One fear is that Europe's debt crisis could deepen. It has already rattled U.S. financial markets. And it could further dampen demand for U.S. exports.
Personal income after deducting taxes rose 0.4 per cent in the first three months of the year. But the government sharply revised down its estimate of after-tax income growth in the fourth quarter of last year to only 0.2 per cent. That's down from the previous estimate of 1.7 per cent.
People financed their increase in spending by saving less. The savings rate fell to 3.6 per cent of disposable income in the first quarter. That was down from 4.2 per cent in the first quarter and was the lowest savings rate since it stood at 2.5 per cent in the fourth quarter of 2007.
The unemployment rate has fallen a full percentage point since August — from 9.1 per cent to 8.1 per cent last month. Part of the season for the drop is that employers added 1.5 million jobs during that time. But it has also declined because some people have grown discouraged and given up looking for work. The government only counts people as unemployed if they are actively looking for a job.
Some fear that means the job market could be weakening. But economists have cautioned that a warm winter led companies to move up some hiring that normally wouldn't occur until spring. That gave the appearance that the economy had strengthened in January and February and weakened in early spring.
The government reports Friday on May job growth. Economists expect 158,000 jobs created, slightly better than the past two months but far below the winter's pace. They also expect no change in the unemployment rate.
One positive development this month: gas prices have fallen sharply.
A gallon of regular unleaded has dropped by 31 cents since peaking in the first week of April. U.S. retail gasoline prices fell by a penny Wednesday to $3.63 per gallon, according to auto club AAA.
Experts see gas falling to at least $3.50 by July 4.Suggest a correction