The Economy's Spring Slowdown Is On

Tax hikes and federal spending cuts are finally catching up with the economy.

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It's become an unusual rite of spring: The economy heats up only to cool off as the April showers start to moisten the ground.

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For what would be the fourth year in a row, second-quarter GDP growth seems to be slowing sharply despite earlier signs of strength. The first big sign of a downturn was the weak jobs report for March, when employers created just 88,000 jobs, barely half what economists had been expecting. That led to downgrades in expected job growth for April and May, with some economists predicting total job creation could be as low as zero.

Others signs of a weakening economy have followed. Retail sales have slumped, manufacturing activity has declined, builders have taken a breather and the stock market, after hitting new record highs, seems to have begun a much-anticipated pullback. "A spring slowdown looks to be in place," economist Joel Naroff wrote in a recent analysis. "The economy is hardly falling apart, [but] the momentum we had has been slowed."

This is more or less what economists expected to happen at the start of the year, as they looked ahead to tax hikes and spending cuts that would cut GDP by a percentage point or more. The big surprise was that consumers didn't react immediately by curtailing spending, which would have been typical.

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But what looked like extraordinary resilience a couple of months ago now seems more like a delayed reaction. Spending has slowed after all. Confidence has receded lately. And investors who have been piling into stocks have been doing it reluctantly, buying mostly "defensive" shares that tend to hold up in a downturn.

First-quarter corporate earnings, which are just beginning to roll in, will reveal whether CEOs are beginning to feel gloomier. So far, big companies such as Pepsico and Goldman Sachs have reported modest increases in net income but weak growth in revenue, which means companies are maintaining profitability by cutting costs and improving efficiency, not by getting new business. That's a hallmark of a stagnant economy. Wall Street is watching closely to see whether CEOs cut their forecasts for future profits.

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The most likely scenario is a subpar spring and summer, followed by a pickup in the fall as the economy begins to adjust to government austerity measures. First-quarter GDP numbers haven't been released yet, but Moody's Analytics is predicting strong growth of 3.4 percent, followed by a meager 1.5 percent for the second quarter and 2.3 percent for the third. That dip in growth would be more than enough to persuade the Federal Reserve to continue its easy-money policy, even though Fed officials have begun to talk more openly about when to end it—which will be a momentous turning point for the economy, when it happens.

Many Wall Street analysts foresee a stock-market correction of 5 or 10 percent, but they tend to believe it will be short-lived, followed by a rebound later this year. If they're right, and 2013 turns out to be the year the economy recovers for good, the spring slowdown is one ritual we'll be happy to avoid in 2014.

Rick Newman's latest book is Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.