U.S. economy incurs sharp slowdown in 1st quarter

4/29/2011

WASHINGTON -- The economy slowed sharply in the first three months of the year. High gasoline prices cut into consumer spending, bad weather delayed construction projects, and the federal government slashed defense spending by the most in six years.

The 1.8 percent annual growth rate in the January-March quarter was weaker than the 3.1 percent growth in the previous quarter, the Commerce Department reported Thursday. And it was the worst showing since last spring, when the European debt crisis slowed growth to a 1.7 percent pace.

Federal Reserve Chairman Ben Bernanke and other economists say the slowdown is a temporary setback. They generally agree gas prices will stabilize and the economy will grow at a 3 percent pace in each of the next three quarters.

But gas prices are still going up, the housing market has shown little signs of recovering, and lawmakers are proposing some of the steepest cuts in federal spending in a generation. Those cuts would filter down to state and local governments, which are wrestling with their own budget crises.

"The economy has lost its modest upward momentum, and headwinds such as rising gasoline prices and further budget cuts suggest the recovery will continue at only a moderate pace," said Sal Guatieri, senior economist at BMO Capital Markets.

Rising gas prices are draining most of the extra money Americans are receiving this year from a Social Security payroll tax cut.

That's a major reason why consumer spending cooled in the January-March quarter. Consumers boosted spending at a 2.7 percent pace, down from the previous quarter's 4 percent and the weakest since last summer. Consumer spending is important because it accounts for about 70 percent of economic activity.

"It could have been worse," said economist Paul Dales at Capital Economics. Consumers spent less, but the pace of spending by historical standards is decent.