US economy grows 2,5pc

The first estimate of GDP growth in the first quarter was a solid rebound from the previous quarter’s poor 0,4 percent pace, but it came in below the average analyst forecast of 2,8 percent.

The comeback in the housing sector was one of the key drivers behind the gain, with residential investment rising 12,6 percent.
Consumer spending gained 3,2 percent, a pick-up from the fourth quarter, and non-residential investment continued to grow, albeit at a slower pace, gaining 2,1 percent.

But federal government spending, hit by the “sequester” budget cuts, continued to drag on the economy, falling 8,4 percent.
The US$85 billion in across-the-board spending cuts over seven months officially came into effect on March 1, with the aim of rapidly paring the country’s large deficit.

But agencies were already pulling back during the final months of 2012 in preparation, a key reason for the near-stall in the economy during that period.
The lion’s share of the impact on first quarter growth from the cuts came from an 11,5 percent fall in defence sector investment and consumption.
Defence is required to bear the burden of half of the sequester cuts.

That was enough to diminish the impact of a rebound in private sector activity.
Trade also pulled the headline figure lower. A rebound in imports in the quarter, after the previous period’s slowdown, resulted in an expanded trade deficit that lopped 0,5 percent off of growth.

Jim O’Sullivan, chief US economist at High Frequency Economics, called the report “disappointing”, having hoped for a stronger recovery from the slump at the end of last year. He blamed the unexpected slowdown in March, and predicted stronger activity for this month.

O’Sullivan and other economists were sticking to their forecasts of a pick-up in the second half of the year to a 3,0 percent pace, when the drag from the sequester should ease.
“The sustained strength in the housing market, the pick-up in consumer spending and the further advance in business capital spending . . . suggest the economy has some underlying strength,” said economist Sal Guatieri of BMO Capital Markets.  — AFP.