Doubts Increase on US Recovery after weak GDP Data

Doubts have been cast over the strength of the US economic recovery after output grew at an annualised rate of only 1.8 per cent in the first quarter.

A surge in oil prices held back consumption growth, while public spending fell at every tier of the US government.

Most analysts expect the weakness to be temporary but government support for the economy will start to fade later in the year, so the lack of any acceleration in growth points to years of further pain for the world’s largest economy.

At this stage of a recovery, growth often rebounds by between 4 and 5 per cent. Expansion of less than 2 per cent will not create enough jobs to keep up with population growth and cut the US unemployment rate of 8.8 per cent.

The dollar fell further on release of the growth numbers as investors judged that weak growth would cause US interest rates to stay lower for longer.

Although overshadowed by the growth figures, there was another disturbing economic release on Thursday. Initial claims for unemployment insurance rose to 429,000 and the four-week average rose back to more than 400,000. Jobless claims had been on an improving trend and the reversal suggests that momentum in the labour market might have stalled.

Economists attributed some of the growth weakness to a temporary decline in defence spending and weather-related weakness in construction output.

Sales by consumer goods companies, led by Procter & Gamble, the world’s largest, provided fresh evidence of consumer weakness and, in some product categories, suggested consumers felt more cash-strapped than last year.

Growth was also held back by high petrol prices, which kept growth in real personal consumption spending to an annualised 2.7 per cent, compared with 4 per cent in the fourth quarter of 2010.

Prices increased by 3.8 per cent but, even excluding food and energy costs, they rose at a rate of 1.5 per cent, the fastest since 2008.

Nariman Behravesh of IHS Global Insight said: “While higher gasoline prices are eroding consumer confidence, an improving jobs market is supporting consumer spending. Meanwhile, businesses remain optimistic and are spending more freely on both new technologies and new hires.”

The Federal Reserve on Wednesday revised its outlook for the rest of the year. Officials now expect the US economy to grow at a rate of between 3.1 and 3.3 per cent in 2011, compared with an earlier forecast of 3.4 to 3.9 per cent.