GDP Growth Pulled Back in First Quarter

Economic growth fell from 3.0 percent at the end of last year to 2.2 percent last quarter.

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The United States' economic growth sagged in the first quarter, and relief isn't on the horizon just yet.

According to the Commerce Department, the nation's real gross domestic product grew at an annual rate of 2.2 percent last quarter, down from 3.0 percent in the fourth quarter of 2011. The slowdown was due in large part to a dip in nonresidential spending, such as new warehouses and raw materials to manufacture finished products. A pullback in government spending at federal, state, and local levels also contributed, as well as an increase in imports, the Commerce Department said.

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Offsetting those developments were positive numbers in a variety of areas, including personal consumption, exports, and residential fixed investment, which includes the construction of new homes.

Everyone knows that the recovery has been disappointingly slow and long, with analysts saying it has been almost three times as long as a typical post-recession recovery period. And there is reason to think that it may not be until the end of the year before growth picks up substantially again.

"Historically, it has taken approximately 12 to 20 months for unemployment to fall in an expansion to roughly pre-recession levels," says Brian Hamilton, CEO of financial information company Sageworks. "Right now, we are into the 34th month of the recovery, and, yet, unemployment remains too high."

Historically, housing helps to pull that recovery along. Clearly, that is not happening right now—earlier this week, the S&P/Case-Shiller home price index showed that home prices in U.S. cities continue to decline. That is significantly weighing down GDP numbers.

"In a typical recovery, housing adds a point to GDP for several quarters," says David Shulman, senior economist at UCLA's Anderson Forecast, and a contributor to US News and World Report. "If this were a normal recovery, the 2 percent [in GDP growth] would be 3 percent,"

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Personal consumption is another factor holding back recovery as Americans buy less and pay down their debts, says Shulman. In a typical recovery, he says, those expenditures might grow at 3 to 4 percent. In the first quarter, personal consumption spending moved toward that territory, growing by 2.9 percent, a marked improvement over the previous quarter's 2.1 percent.

Still, even this figure may depend in part on a housing recovery, says Shulman, "because in part, people consume less because their housing wealth will deteriorate."

All of this spells continued sluggishness in the recovery. A full housing recovery seems far off, as prices are still finding the bottom. In addition, the second quarter could show a pullback in growth as some spending and hiring was shifted earlier in 2012 due to a warm winter.

"My guess is that GDP growth in Q2 will be below Q1 because of payback from the good weather," says Shulman.

However, even moderate growth is still growth, and over the longer term, it is still expected to pick up considerably. Business that expanded their inventories rapidly in the fourth quarter and pulled back last quarter will have to expand again sooner or later. Likewise, the economic shock of warm weather will eventually wear off.

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Some members of the Federal Reserve's Federal Open Market Committee this week showed that their outlook is improving, boosting their forecasts for 2012 GDP over those they made in January. The members' central tendency estimates—that is, excluding the three highest and three lowest predictions—are for GDP to grow between 2.4 and 2.9 percent this year, up from their earlier prediction of 2.2 to 2.7 percent.

Members slightly dialed back those estimates for 2013 and 2014, but the forecast still calls for acceleration, to 2.7 to 3.1 percent next year, and 3.1 to 3.6 percent in 2014.

Danielle Kurtzleben is a business and economics reporter for U.S. News & World Report. Connect with her on Twitter at @titonka or via e-mail at dkurtzleben@usnews.com.

Corrected on : UPDATE: This article has been updated to attribute a quote to Brian Hamilton, CEO of Sageworks.