Government cutbacks slow down economy's growth for first quarter

Washington - The U.S. economy expanded at a sluggish 2.2 percent annual rate from January through March, the government said Friday in a confounding report that spotlighted the continuing challenge of spurring strong growth.

Most forecasters had expected growth in the 2.5 to 3 percent range. The disappointing first-quarter number mirrored the closely watched March jobs report earlier this month, which also fell short by adding only 120,000 jobs after a string of stronger months.

Although the headline number for the nation's gross domestic product - the sum of goods and services produced in the U.S. economy - came up short of expectations, the report's component parts offered rays of hope. They showed consumption remaining strong in a recovering private sector, while a slowdown in government spending dampened overall growth.

If only private-sector components of the GDP are taken into account, the economy grew at a 3.5 percent annual rate in the first three months of this year, according to Alan Krueger, the head of the White House Council of Economic Advisers. And continuing losses of state and local government jobs keep dragging down the monthly employment numbers. These trends raise questions about the course of federal budget policies that will be argued throughout this presidential election year.

While Democrats call for deeper cuts in military spending and Republicans want to reduce spending on social programs, both options would slow the already struggling U.S. economy. Late this year and again next year, lawmakers in Washington are expected to try to curb future spending growth in an effort to narrow yawning budget deficits and soaring federal debt.

Defense spending fell by 8.1 percent in the first quarter.

"The big declines in defense outlays won't continue, but it does highlight the head winds from what will be a long period of declining government spending," said Mark Zandi, the chief economist for forecaster Moody's Analytics.

Meanwhile, the economy continues to grow, but not robustly.

"This isn't boom times, but it is enough to generate enough jobs to push unemployment slowly lower," Zandi said. "Having said this, growth in the quarter was less than expected, mostly because of sharp declines in defense spending and weak business investment."

The real disappointment in Friday's report was a drop in business fixed investment of 2.1 percent and in spending on business structures of a whopping 12 percent. Spending on equipment was up by only a weak 1.7 percent, which partly reflects the end of a tax break for business investment last year.

The weak business spending stood in stark contrast to a 2.9 percent increase in personal consumption expenditures. Consumers spent more even as income growth remained fairly flat.

"I think what it says is consumers are coming back a bit, but firms are still holding back. They don't feel confident enough in the recovery to start adding to capacity" and expanding, said Bill Craighead, an economics professor at Wesleyan University in Middletown, Conn. Consumers appear to be making up for cautious spending in recent years, more confident that the worst is over, he suggested.