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April 27, 2011

US Economic Growth Slows

U.S. economic growth slowed in the first three months of this year, as energy prices rose and state and local government spending fell.  But many experts expect growth to recover later this year.

The U.S. Commerce Department said Thursday that the U.S. gross domestic product grew at a 1.8 percent annual rate during the first quarter. That is sharply lower than the 3.1 percent annual rate of expansion seen in the last three months of 2010.

Economists say rising gasoline prices hurt the growth rate.  When consumers have to spend more money on energy, they have less to spend on everything else.  Consumer spending drives about 70 percent of all U.S. economic activity, so lower spending cuts demand and growth.

The chief financial economist of the Bank of Tokyo-Mitsubishi, Chris Rupkey, sees signs that personal spending and business investment will rebound and bring growth back up.

"The heart and soul of GDP, consumer spending, is at 2.7 percent, stronger than it looked a month ago.  And business capital spending is still strong at 11.6 percent," he said.

Rupkey spoke on the Bloomberg financial news service.

Officials at the U.S. central bank have said they expect the higher gasoline prices to be a temporary problem, and predict U.S. economic growth will return to around 3 percent later this year.

White House economic advisor Austan Goolsbee says the administration has helped growth with tax cuts and incentives for business investment.  He says faster growth is needed to replace the millions of jobs lost in the recession.  

There was discouraging news on the issue of jobs Thursday, as the number of Americans signing up for unemployment compensation rose 25,000 to reach a total of 429,000.

That is higher than the number seen in a healthy job market, but well below the number seen at the worst of the recent recession.

Economist Rupkey says the weekly jobless claims will have to drop if economic growth is to improve. "We need to see initial unemployment claims fall sharply below 400,000 in coming weeks to make sure the economy is not slowing due to this latest headwind of higher gasoline prices," Rupkey said.

GDP growth was also hurt by the lingering effects of the recession.  The economic slowdown hurt the tax revenue collected by state and city governments, forcing them to cut budgets, spending, and jobs.  

Economists and investors watch the GDP closely because it is the broadest measure of the economy, and accounts for all the goods and services produced in the country.