US economy fades as government spending retreats

Frederic J. Brown / AFP - Getty Images

People walk past a sign leading to a job center in Rosemead, east of downtown of Los Angeles in the San Gabriel Valley on May 24, 2012 in California.

By John W. Schoen, Senior Producer

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European-style "austerity" is hitting home in the U.S.

Thanks to deeper-than-estimated cuts in government spending, the U.S. economy slowed faster in the first quarter than originally reported, the Commerce Department said Thursday, raising concerns that the U.S. could be at risk of following Europe back into recession.
Gross domestic product expanded at a 1.9 percent annual rate in the first quarter, less than the 2.2 percent the government had estimated last month. That compares to the 3.0 percent rate set in the fourth quarter of last year.

"The GDP number isn't a surprise, but anytime you dip under two percent we always head into recession,” said Todd Schoenberger, an investment adviser at The Blackbay Group. “The final read will be much more important. It doesn't look good for the economy right now."
Much of the downward revision to GDP was the result of a steeper drop in government spending, which fell at a 3.9 annual percent rate, instead of the previously reported 3.0 percent.

“At least at the state and local level, where there isn't a Federal Reserve, these governments have to meet their budgets and they're in an ongoing restructuring," said John Silvia, chief economist at Wells Fargo. Silvia predicted that the slowdown in government spending is likely to be a drag on the employment data the government will release on Friday.

Economists expect that non-farm payroll jobs exanded by 150,000 in May, up from 113,000 in April. The slowdown in job creation could be a setback for President Barack Obama as he battles for re-election against former Massachusetts Gov. Mitt Romney. The Romney campaign has been touting his business acumen and job-creation chops, which seems to be resonating with voters who, in recent polls, have closed the gap between Obama and Romney in some key states.

Thursday's report offered signs that the U.S. economy may continue to muddle along on a slow-growth pace until the election. Business spending on equipment and software was revised upward to show a much firmer 3.9 percent growth rate in the first quarter instead of the previously estimated 1.7 percent pace. But the report said after-tax corporate profits dropped for the first time in three years.

Consumer spending grew at a 2.7 percent pace instead of the previously reported 2.9 percent. That was higher than the fourth-quarter's 2.1 percent pace.

Investors continued to sell stocks and park their money in the relatively safe haven of bonds Thursday. Demand for U.S. Treasuries sent the price of 10-year notes higher, pushing the yield lower than it's been in at least 60 years. Rates for 30-year mortgages hit a record low of 3.75 percent.

The economic slowdown is already hitting the job market, where employment has weakened in the past two months after a burst of new hires over the winter. The unemployment rate has been edging lower, but only because discouraged workers have been leaving the workforce faster than new jobs are created. That trend will likely reverse once the exodus from the labor pool slows.

New claims for unemployment benefits rose again in the latest week, raising worries that labor market growth was weakening further. The Labor Department reported Thursday that seasonally-adjusted claims increased by 10,000 to 383,300. That was the fourth week in a row that claims have risen.

Private employers have also slowed hiring and created 133,000 jobs in May, fewer than expected, according to the latest numbers from payroll processor ADP.
The slowdown comes as Europe’s widening financial crisis and deepening recession are also weighing on consumer and business confidence in the U.S.

"The euro zone situation has intensified and if it persists, the numbers are likely to be tepid like today's for several months," said Joel Prakken, who tracks the ADP numbers at Macroeconomic Advisors. "They're well short of what we need to see the national unemployment rate fall on a consistent basis."

The slowdown appears to be spreading to other sectors, including manufacturing and construction. Last week, the Commerce Department reported that demand for long-lasting manufactured goods rose less than expected in April. New orders for durable goods rose just 0.2 percent last month, after a revised 3.7 percent drop in March. Orders were dragged down by a 2.8 percent drop in machinery and 34 percent fall in military aircraft. New orders for computers and electronic products fell 0.6 percent.

On Thursday, the Institute for Supply Management-Chicago said its index of Midwest business activity fell sharply this month to 52.7 from 56.2 in April. Economists had been expecting a reading of 56.5 for May.

The U.S. economic slowdown comes amid wider signs that the recession in Europe and a slowing economy in China are dampening the pace of global trade. That could spell trouble for U.S. manufacturers, who have been enjoying a renaissance after heavy investment in high-tech equipment to boost productivity and better competition with low-wage economies like China.
“It looks like goods production has slowed and employment in the goods sector has slowed,” Prakken said. “This is a phenomenon we're seeing globally as lots of indices from parts of the world suggest a slowing in that part of the world's economy."

 

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