Consumers Help Drive U.S. Economy to 3.2% Growth Rate

Consumers Help Drive U.S. Economy to 3.2% Growth Rate
By CATHERINE RAMPELL
Copyright by The New York Times
Published: April 30, 2010
http://www.nytimes.com/2010/05/01/business/economy/01econ.html?th&emc=th


The United States economy has expanded for three quarters in a row, the Commerce Department said on Friday, helped along by consumer spending. Now the question is, Will the jobs follow?

The broadest measure of the overall economy grew at an inflation-adjusted annual rate of 3.2 percent in the first quarter of 2010, the Commerce Department reported. It had expanded 5.6 percent in the fourth quarter of 2009 and 2.2 percent in the third quarter.

While the expansion is welcome, it has not delivered the level of hiring needed to recover the ground lost during the recession.

Speaking in the Rose Garden on Friday, President Obama acknowledged that many Americans might find little comfort in the numbers because “ ‘you’re hired’ is the only economic news they’re waiting to hear.”

Still, economists are hopeful that news of solid, continued growth may bolster business confidence and persuade more companies to expand.

“It’s been a case of, when will they stop worrying and learn to love the boom?” said Robert J. Barbera, chief economist at ITG, who added that many analysts and companies had underestimated the economic turnaround.

After dragging their heels for many months, consumers were at last a major contributor to economic growth in the first quarter. Consumer spending grew at an annual rate of 3.6 percent, a big gain from the 1.6 percent rate of the previous three months. Purchases of durable goods like cars led the way.

Whether Americans might retrench for the long haul after seeing their homes lose value has been one of the biggest questions about the aftermath of the Great Recession. Consumer spending makes up more than 70 percent of the economy, and it usually drives growth during economic recoveries.

Economists are hopeful that families will continue to pick up the pace of purchasing and make the recovery more sustainable, although consumers may remain cautious about spending given the tepid growth in job creation and personal income. Consumer sentiment dipped slightly in April, according to a Reuters/University of Michigan consumer sentiment index released on Friday.

“We haven’t had consumer spending growth this strong in three years,” said Nigel Gault, chief United States economist at IHS Global Insight. “But the caveat is that with real disposable incomes not growing, this was all done through the saving rate. We cannot rely on consumers continually driving down their savings. They need income support from hiring.”

Small businesses say Americans are loosening up a little after a bewildering period of debt reduction and uncertainty.

Nate Evans, who owns a pottery-making business with his wife, Hallie, in New Albin, Iowa, said sales in 2009 were the worst ever but that business was just starting to pick up. The Evanses sell their wares from their Allamakee Wood-Fired Pottery home studio as well as in galleries in nearby states, and at craft shows in Wisconsin, Minnesota, Iowa and Illinois.

“I felt like the energy of the crowd was better,” Mr. Evans said of the first fair this year, in Minnesota, adding that other craft sellers seemed to agree. “Most of the people we talked to said it was better than last year. Hey, it’s not great, but it’s better than last year.”

Just as Americans stepped up their purchases of autos and other products in the first quarter, companies invested more in capital goods. Business purchases of equipment and software, for example, grew at an annual rate of 13.4 percent, building on a 19 percent increase in the final quarter of 2009.

For the first time in two years, businesses started increasing their stockpiles of goods. This inventory growth accounted for about half of the expansion in the first quarter. In the previous quarter, about two-thirds of economic growth resulted from a decision by companies to draw down their inventories more slowly — that is, not clearing their stockroom shelves so quickly but still not adding to them.

Additional spending by companies “is very good news, since it indicates businesses are feeling more confident about the expansion to start spending some of their cash,” Mr. Gault said. “If businesses are spending more on equipment, usually that would go along with more hiring, too.”

Federal government spending, including some remaining money from stimulus programs, grew at an annualized rate of 1.4 percent in the first quarter. But this was more than offset by continued cuts by state and local governments, whose spending decreased 3.8 percent. It was the third consecutive quarterly decline for state and local spending.
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“Government spending contracted, for all the ballyhoo about stimulus,” said John Ryding, chief economist at RDQ Economics. “This recovery is going to have to stand on the backs of private-sector demand, not on government demand, given all the current fiscal challenges.”

Modest expansion in business activity may not be enough to ease the lasting pain of the recession, many economists say.

Hiring only recently began to materialize, with the economy adding 162,000 jobs in March, of which 48,000 were temporary Census-related positions. The economy had shed about eight million jobs since the recession began in December 2007.

Job growth hasn’t been as strong as economic growth for several reasons, economists say. Businesses have found ways to make more with fewer resources, meaning that they have been able to meet additional demand for their products without bringing on many new workers. And companies are sitting on a tremendous amount of cash and appear unwilling to spend it.

“Companies may be reluctant to invest because there’s an enormous amount of uncertainty ahead for them, not just in health care policy but tax policy,” said Paul Ashworth, senior United States economist at Capital Economics. “This isn’t just about the sustainability of the recovery itself.”

Mr. Obama, in his remarks on Friday morning, rejected criticisms that his policies were bad for hiring by talking about tax cuts for small businesses, loans backed by the government and investments in areas like clean energy — policies intended in part to encourage job creation.

Even if hiring does finally start to grow at the same rate with demand, the economy is simply not growing fast enough to make a big dent in unemployment, economists say.

The nation’s gross domestic product — a broad measure of goods and services produced in the country — is far below its potential, according to projections of where the economy would have been had it followed its long-term trend.

Output would need to grow at least 5 percent annually for several years to get back on track — and perhaps what is more important, to stimulate enough job creation to employ the 15 million Americans already out of work and the 100,000 new workers joining the labor force each month.

Right now, many economists expect the nation’s output to expand 2.5 to 3.5 percent this year.

“Unless the pace of growth picks up significantly, we will see high unemployment rates for years to come,” said Josh Bivens, an economist at the Economic Policy Institute, a liberal research organization in Washington.


Christine Hauser contributed reporting.