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U.S. economy expands at faster pace

Strongest consumer spending in more than two years

Posted: Apr 26, 2013 9:05 AM ET

Last Updated: Apr 26, 2013 10:49 AM ET

U.S. economic growth accelerated from January through March, buoyed by the strongest consumer spending in more than two years. The strength offset further declines in government spending that are expected to drag on growth throughout the year.

The Commerce Department said Friday that the overall economy expanded at an annual rate of 2.5 per cent in the first quarter, rebounding from the anemic 0.4 per cent growth rate in the October-December quarter.

Much of the gain reflected a jump in consumer spending, which rose at an annual rate of 3.2 per cent. That's the best since the end of 2010.

Businesses responded to the greater demand by rebuilding to their stockpiles. And home construction rose further.

But government spending fell at a 4.1 per cent rate, led by another deep cut in federal defence spending. That kept growth below economists' expectations of a rate exceeding 3 per cent. And broad government spending cuts that began in March are expected to weigh on the economy for the rest of the year, while higher taxes have started to make some consumers and businesses cautious.

Many economists say they think growth as measured by the gross domestic product is slowing in the April-June quarter to an annual rate of just 2 per cent. Most foresee growth remaining around this subpar level for the rest of the year.

GDP is the broadest gauge of the economy's health. It measures the total output of goods and services produced in the United States, from haircuts and hamburgers to airplanes and automobiles.

The cuts in government spending have forced federal agencies to furlough workers, reduced spending on key public projects and made businesses more nervous about investing and hiring this year.

The cuts came two months after President Barack Obama and Congress allowed a Social Security tax cut to expire. That left a person earning $50,000 a year with about $1,000 less to spend this year. A household with two high-paid workers has up to $4,500 less.

Consumers' take-home pay is crucial to the economy because their spending drives roughly 70 per cent of growth.

Americans appeared to shrug off the tax increase at the start of the year. They boosted spending in January and February, helped by a stronger job market. In part, that's why growth is expected to be solid in the first quarter.

But hiring slowed sharply in March. And consumers cut back their spending at retail businesses, a sign that many were starting to feel the tax increase. Economists expect spending to stay weak in the second quarter as consumers adjust to their smaller paychecks.

Ben Herzon, an economist at Macroeconomics Advisers, said the tax increases could shave roughly 1 percentage point from growth this year. He also expects the government spending cuts to reduce growth by about 0.6 percentage point.

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