By CHRISTOPHER S. RUGABER and PAUL WISEMAN, Associated Press
WASHINGTON (AP) — Don't panic yet. The government reported Friday that the economy got off to a tepid start this year, but that doesn't foreshadow a repeat of the near-standstill that happened in 2011.
"The economy is firmly on a growth trajectory," said Sung Won Sohn, an economics professor at California State University's Smith School of Business. "The first-quarter slowdown will be temporary."
Still, the January-March report was discouraging.
Economists had expected gross domestic product — the broadest gauge of economic output — to expand at a 2.5 percent annual rate for the first three months of the year. Instead, the Commerce Department said it was 2.2 percent, mainly because of government budget-cutting and a slowdown in business investment.
And some of the January-March growth, meager as it was, probably came at the expense of the current quarter. An unseasonably warm winter pulled car buyers into showrooms earlier than usual.
The same was true for housing construction. That's one reason it jumped at a 19 percent pace from January through March.
Economists doubt consumers can keep spending as freely as they did in the first three months of this year: an annual pace that was 2.9 percent faster than in the previous quarter and the fastest in more than a year. They probably can't afford to. Americans' after-tax income rose just 0.6 percent in the first three months compared with a year earlier. That was the puniest pay increase in two years.
People spent more in part because they socked away less. The savings rate fell to 3.9 percent of after-tax income. That was down from 4.5 percent. Economists worry that people won't keep spending more unless their income grows.
Stock prices rose Friday despite the report of weaker growth. David Rosenberg, chief economist at Gluskin Sheff, said investors might have bid up stocks because they think the Federal Reserve is more likely to pursue another round of bond buying to stimulate the economy.
Fed Chairman Ben Bernanke "has created the impression that if the economy stumbles, he'll be there to hold your hand," Rosenberg said.
The lackluster first-quarter growth follows government reports that hiring slowed sharply in March and the number of people seeking unemployment benefits reached a three-month high.
With 12.7 million people unemployed, today's economy needs much faster growth to boost hiring. Growth would have to be roughly 4 percent for a full year to lower the unemployment rate, now 8.2 percent, by 1 percentage point.
In 2011, a series of setbacks struck the economy. Gas prices rose sharply. An earthquake in Japan shuttered factories there and cut off supplies to U.S. manufacturers. A standoff in Washington brought the federal government to the brink of default, rattling investors and consumer confidence. And Europe's debt crisis threatened to diminish U.S. exports and further spook investors.
The economy slowed to an annual rate of just 0.4 percent in the first quarter of 2011. Unemployment, which had been falling, rose again last summer.
But most economists think the U.S. economy is more resilient this year.
The job market, household finances and businesses are all in better shape than they were a year ago. Supplies are flowing freely. Political bickering has eased. And the fears about Europe have subsided at least temporarily.
"People are less concerned that the eurozone crisis could engulf the whole world," says Nigel Gault, an economist with IHS Global Insight.
A 55-cent run-up in gasoline prices (to an average $3.83 a gallon) isn't hurting as much this year. In part, that's because drivers are getting used to paying more. And families' finances are sturdier after another year of paying down debts.
In addition, some factors that held back growth in the first quarter aren't expected to last. Businesses splurged on software and equipment at the end of 2011 because of an expiring tax break. That stole economic activity, in effect, from the first quarter. Companies will probably resume spending again later this year.
And economists say government spending will probably rebound — or at least stop falling — because state and local governments are collecting more tax revenue as their economies slowly recover.