Economic Growth Slows on Gas Prices, Spending

Editor’s Note: The Fed has printed trillions of dollars driving up the cost of everything and our government has put us trillions more into red ink to ‘stimulate’ the economy and this is what we end up with. Keynesian was a bald-faced lie to begin with and is now completely discredited.

April 28 (Bloomberg) — The U.S. economy grew at a slower pace than forecast in the first quarter as government spending declined by the most since 1983.

Gross domestic product rose at a 1.8 percent annual rate from January through March after a 3.1 percent pace in the last three months of 2010, the Commerce Department said today in Washington. Economists projected 2 percent growth, according to the median estimate in a Bloomberg News survey.

To keep spurring the expansion, Federal Reserve policy makers said yesterday they’ll complete their $600 billion round of stimulus through June. While slower than the previous three months, a reflection of higher gasoline prices, consumer spending climbed more than projected in the first quarter.

“We’ve sputtered a bit here, especially coming off a relatively strong fourth quarter,” said Sam Bullard, a senior economist at Wells Fargo Securities LLC in Charlotte, North Carolina, who accurately forecast first-quarter growth. Even with the higher costs for fuel and food, “consumers are going to continue to spend. Growth should pick up toward the 3 percent level” later this year, he said.

GDP estimates from 80 economists surveyed by Bloomberg ranged from 0.5 percent to 3.5 percent. The first-quarter pace was the slowest since April through June of last year. For all of 2010, the world’s largest economy expanded 2.9 percent, the most in five years, after shrinking 2.6 percent in 2009.

New applications for jobless benefits unexpectedly rose last week to the highest level in three months. Unemployment insurance claims jumped by 25,000 to 429,000, the Labor Department said. The government anticipates a drop in unadjusted claims during the week leading up to the Easter holiday, something that didn’t happen this year, a Labor Department spokesman said.

Stock-Index Futures

Stock-index futures dropped after the reports and Treasury securities rose. The contract on the Standard & Poor’s 500 Index fell 0.2 percent to 1,348.6 at 8:53 a.m. in New York. The yield on the benchmark 10-year Treasury note, which moves inversely to prices, fell to 3.32 percent from 3.36 percent late yesterday.

Slower first-quarter growth explains why the Fed trimmed its 2011 forecast to 3.1 percent to 3.3 percent, according to its latest so-called central tendency, released yesterday. In January, the central bankers projected 3.4 percent to 3.9 percent expansion.

“I would say roughly most of the slowdown in the first quarter is viewed by most on the committee as transitory,” Fed Chairman Ben S. Bernanke said at a news conference in Washington following the central bank’s policy meeting yesterday.

Consumer Spending

Household purchases, which account for about 70 percent of the economy, rose at a 2.7 percent pace last quarter after a 4 percent gain in the final three months of 2010.

The gain in consumer spending from January through March compared with a 2 percent median forecast in the Bloomberg survey. Purchases added 1.91 percentage points to growth. (Higher gas and food prices account for ALL of this increase). This is not ‘good’ as the spinmeisters would have you believe.

Government purchases fell at a 5.2 percent annual rate, the biggest drop since 1983, after a 1.7 percent decrease in the fourth quarter. National defense spending dropped at an 11.7 percent pace, the most since 2005. Federal government spending fell the most in 11 years.

Residential construction fell at a 4.1 percent rate, while the trade deficit subtracted 0.1 percentage point from GDP, today’s report showed.

Manufacturing Gains

Manufacturing industries, which account for 11 percent of the economy, are likely to remain at the forefront of the recovery on growing demand from abroad and the need to replenish inventories. This is another lie; the sector is shedding jobs – again.

Inventories last quarter were stocked at a $43.8 billion pace, compared with a $16.2 billion rate in the fourth quarter. Excluding inventories, the economy climbed at a 0.8 percent annual rate from January through March, the slowest since the third quarter 2009.

Spending on equipment and software climbed at an 11.6 percent annual last quarter, up from 7.7 percent the previous three months.

“After a period of widely fluctuating demand in late 2008 through last year, we anticipate that 2011 will be the beginning of a period of sustained growth in our truck engine markets in the U.S.,” Thomas Linebarger, chief operating officer of Cummins Inc., said on an April 26 teleconference.

The Columbus, Indiana-based maker of diesel engines projects 2011 sales to be up 30 percent from last year, compared with a previous forecast for a 20 percent gain.

UPS Shipments

United Parcel Service Inc., the world’s biggest package- delivery company, this week bolstered its full-year forecast after revenue per package climbed in all its sectors during the first quarter.

The gains reflect “some of the increased velocity in the core economy with manufacturing and finished goods,” Kurt Kuehn, chief financial officer of the Atlanta-based firm, said in an April 26 telephone interview.

UPS and FedEx Corp. handle goods ranging from financial documents to pharmaceuticals and industrial parts, making them economic bellwethers.

The Fed’s preferred price gauge, which is tied to consumer spending and strips out food and energy costs, climbed to a 1.5 percent annual pace. The Fed’s longer term projection for inflation is a range of 1.7 percent to 2 percent. Rising oil and food costs may push up the prices of other goods and services.

Fed on Inflation

“Increases in the prices of energy and other commodities have pushed up inflation in recent months,” the Federal Open Market Committee said yesterday in its statement after a two-day meeting in Washington. Still, “longer-term inflation expectations have remained stable and measures of underlying inflation are still subdued,” the Fed said.

Bernanke has signaled that the Fed will maintain record stimulus until job growth accelerates and the recovery is robust enough to withstand tighter credit.

Read more at Andy Sutton’s Extemporania