Growth falls short of forecasts, weakness ahead

Fri Apr 26, 2013 1:36pm EDT
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By Lucia Mutikani

WASHINGTON (Reuters) - The economy regained speed in the first quarter, but not as much as expected, heightening fears it could struggle to cope with deep government spending cuts and higher taxes.

Gross domestic product expanded at a 2.5 percent annual rate, the Commerce Department said on Friday, after growth nearly stalled in the fourth quarter. Economists had expected a 3.0 percent growth pace.

"It wasn't the bang-up start to the year we had hoped for, and the signals from March suggested that we will only decelerate from here," said Avery Shenfeld, chief economist at CIBC World Markets in Toronto.

Growth rebounded in the early part of 2013 but data ranging from employment to retail sales and manufacturing weakened substantially in March. It appears the factory sector slowed further in April and many forecasters expect the economy's softness to persist into the third quarter before a convincing revival emerges, given belt-tightening in Washington.

A 2 percent payroll tax cut expired at the start of the year and $85 billion in mandatory spending cuts, known as the sequester, started to take hold at the beginning of March.

Second-quarter growth is expected to come in around a 1 percent pace, with growth for the full year seen around a sluggish 2 percent, about the same as in the prior three years.

"It certainly seems like we are in store for a significantly lower rate of growth than we saw here in the first quarter," said Sam Bullard, a senior economist at Wells Fargo Securities in Charlotte, North Carolina.

Government spending has already been on a downward path.   Continued...

Crews load and unload consumer products at the Port of New Orleans along the Mississippi River in New Orleans, Louisiana June 23, 2010. REUTERS/Sean Gardner