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Economic growth slows, but consumers kept spending

(MoneyWatch) GDP grew at a 2.2 percent annual rate in the first quarter of 2012, a slowdown from the previous quarter's growth of 3 percent. That's just below normal growth, so it's enough to keep the recovery growing at the present rate. But a 2.2 percent GDP growth rate translates roughly into an annual decline in unemployment of just over 1 percentage point, and at that pace we won't reach full employment for several years.

The details of the report provide a bit more encouragement. In particular, private sector growth was relatively robust. Personal consumption expenditures increased at a 2.9% annual rate, and residential investment increased at a 19.1% annual rate. However, investment in equipment and software slowed to a 1.7%, and non-residential investment (spending on plants and equipment) was negative, falling 2.1 percent. Changes in inventory levels also detracted from growth. Overall, private sector growth was approximately 2.7 percent. That's lower than in many past recoveries when private sector growth was as high as 4 to 5 percent. Households had large losses in housing, stocks, and other assets they depend upon for retirement, education and other needs, and it takes time to overcome these losses -- and that helps to explain why this recovery is slower than in the past.

However, the biggest negative drag on output growth is due to the 3 percent cuts in government spending at the federal, state, and local levels, including cuts in defense spending. These cuts held down the overall growth rate by approximately a half of a percentage point (from 2.7% for the private sector alone to 2.2 percent overall). But there's some hope that the state and local cuts that have been weighing on growth in recent quarters are coming to an end, and if that happens growth could pick up.

These numbers should be qualified by noting that they may have been inflated somewhat be good weather during the first quarter, and the numbers are preliminary and likely to be adjusted later. In addition, the consumption growth was fueled, in part, by a decline in savings. But as it stands, the slowdown in the US in the first quarter relative to the fourth quarter of last year is worrisome given similar trends in the rest of the world. We learned Thursday that the UK is re-entering a recession -- a double-dip -- and wider troubles in Europe along with uncertainties about China's ability to continue growing at such high rates create considerable uncertainty going forward. The economy is also vulnerable to an oil price shock.

The relatively strong private sector growth, the hope that the declines in government spending driven by state and local budget problems are abating, and the general upward trend in employment, consumption, investment, and other macroeconomic indicators in recent quarters gives some room for hope. But the numbers in the GDP report must be qualified for the reasons given above, and the possibility of large bumps in the road ahead must be taken seriously. We are not yet in the clear. But the report could have been far worse, and for now we are still moving forward.

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