This far into a recovery, the economy is supposed to be roaring ahead, which makes the stumble in first quarter growth all the more disappointing. The question consumers, investors, businesses and government leaders now face is: Was it a temporary pause or a sign that slower growth lies ahead?
After sailing along at a 3.1 percent growth rate in the last three months of 2010, U.S. Gross Domestic Product slowed sharply in the first quarter of this year to a 1.8 percent annual rate.
The slowdown, according to economists, was blamed on a collection of forces outside the control of the government. The list includes an unusually harsh series of winter storms, a surge in gasoline prices and a temporary lull in defense spending.
"The biggest factor was weather,” said Stephen Stanley, chief economist at Pierpont Securities in Stamford, Conn. “It hurt consumption and construction. Energy also hurt consumption as well. Higher gasoline prices took a bigger bite out of people's budget."
What's less clear is whether the forces holding back first quarter growth are temporary, or whether they may linger into the rest of the year.
- Weather: The winter storm season may be over, but the extreme weather continues to wreak havoc in much of the country. In recent weeks, tornadoes have ravaged the South, floods are threatening much of the Midwest and a prolonged drought continues to grip the Southwest. Any shortfall in crop yields would further tighten grain supplies, adding to the upward push in food prices.
- Inflation: Pump prices topping $4 a gallon in many parts of the country have wiped out much of the boost that a payroll tax cut gave to consumer spending. After jumping roughly $1 a gallon in the past year, the rise in gas prices is expected to slow. But the higher cost will still put a damper on spending. Higher prices for food and other raw materials are beginning to put a squeeze on corporate profits.
- Government spending: First quarter growth also got clobbered by a temporary pullback in defense spending, which dropped more than 11 percent. As last year’s emergency stimulus package winds down, that spending will continue to dry up. Deeper cuts are expected as Congress and the White House grapple with a ballooning federal deficit that is threatening the government’s AAA debt rating.
- Housing: As the housing industry enters its fourth spring selling season with little signs of improvement, one of the biggest sectors of the economy has yet to contribute to growth. The recent resumption of falling home prices and a large backlog of foreclosures will likely keep the housing industry on the sidelines indefinitely.
- Confidence: Consumer and business confidence was shaken by a series of global events that included the devastating earthquake in Japan and the outbreak of widespread turmoil in the Middle East. So far, the loss of Japanese production of car parts and electronic components has had only limited impact on global manufacturing. But the spread of unrest in the Arab world remains a major source of uncertainly.
Though the economic recovery official began in June, 2009, Americans remain unconvinced. More than half told a Gallup poll that the U.S. economy is in a recession or a depression, despite official data showing a slow recovery underway.
The April 20-23 survey of 1,013 U.S. adults found that only 27 percent said the economy is growing. Twenty-nine percent said the economy is in a depression and 26 percent said it is in a recession, with another 16 percent saying it is "slowing down," Gallup said.
The poll findings have a 4 percentage point margin of error, according to Gallup.
To be sure, Thursday’s disappointing report on first quarter growth contained some evidence that the recovery may soon get back on a track of higher growth. Businesses continued to invest in new equipment at a healthy pace, suggesting they see stronger demand. The manufacturing sector grew by 9.1 percent in the first quarter, up from 3.5 percent in the fourth quarter of last year.
But the first quarter slowdown casts doubt on whether the momentum generated last year will continue. Propped up by hundreds of billions of dollars worth of stimulus spending and payroll tax cuts, along with record low interest rates engineered by the Fed, the slowdown wasn’t supposed to happen.
“All things considered, it could have been worse,” said Paul Ashworth, chief U.S. economist at Capital Economics. “Nevertheless, in a quarter when the economy began to benefit from additional monetary and fiscal stimulus, we had originally expected a lot more.”
In his first-ever press conference Wednesday, Fed Chairman Ben Bernanke assured reporters that the forces behind the slowdown were “transitory,” and that central bankers see growth bouncing back to a pace that will put it back on track to grow between 3.1 percent to 3.3 percent in 2011. (That update trimmed the Fed's previous forecast of 3.4 percent to 3.9 percent growth 2011.)
Private economists are also upbeat about the rest of the year. A quarterly survey of 42 forecasters this week by The Associated Press found they expect GDP to advance by 3.2 percent in the current quarter, 3.4 percent from July through September and 3.5 percent from October to December. They also expect employers to picking up the pace of hiring, pushing the unemployment rate — now 8.8 percent — down to 8.4 percent by year end.
Even if it shakes off the “transitory” impact of bad weather and higher gas prices, the U.S. economy will have to accelerate even faster than its best quarter last year to overcome the impact of the sluggish first quarter.
"Coming in at 1.8, to get to where Fed's forecast is, you're going to need some robust growth," said Bob Andres, chief investment strategist and economist at Merion Wealth Partners in Berwyn, Penn. "In my mind, the Fed's forecast and the Street's forecast are more than likely a little too optimistic."