Growth in the US economy falls back in first quarter

Ford car Demand for cars boosted the US's quarterly economic performance

US economic growth slowed to an annualised pace of 2.2% in the first quarter of the year, from 3% in the final three months of last year.

The figure was below economists' estimates of 2.5% and is equivalent to quarter-on-quarter growth of 0.5%.

The US Commerce Department said businesses had cut back on investment, depressing gross domestic product (GDP).

However, a pick-up in the car market supported the growth figure.

Although the headline figure was weaker than had been hoped for, a key driving force in the fourth quarter had been stockpiling by US firms.

This time, demand from consumers was stronger.

Consumer spending, which accounts for about 70% of the US economy, grew by a 2.9% annual rate, the fastest pace since the fourth quarter of 2010.

Analysis

The figures on economic growth were undoubtedly a disappointment to President Barack Obama, whose re-election chances in November are in great measure tied to the health of the economy.

Polls suggest that 50% of the US population says the economy is the single issue that will influence their vote. Worse for President Obama, 80% of respondents to one recent poll said they believed the country was still in recession. The recession officially ended in June 2009.

The White House acknowledged the need for additional growth but put a positive spin on the news, noting that the 2.2% growth in GDP marked the "11th straight quarter of positive growth".

Mitt Romney's campaign had a different take, saying Mr Obama's policies "have hindered our economic growth and prevented a sustainable, job-creating recovery from taking hold", according to spokeswoman Andrea Saul.

President Obama hits the campaign trail proper next week. The president will take comfort from economists' predictions that the pace of growth will pick up this year. And he had further good news this week: his approval ratings are back up to 50%. All incumbents since Dwight Eisenhower, with ratings of at least 50%, have won re-election.

Motor vehicle sales rose at 2.1% in the fourth quarter, the fastest rate in four years.

Home construction rose at its fastest pace since the second quarter of 2010, boosted by the warmer weather.

There was worse news on business spending, which fell for the first time since the fourth quarter of 2009 and government spending, particularly defence spending, fell back too.

It dropped by 2.1%, a sharp about turn from growth of 5.2% in the fourth quarter.

Investment in equipment and software rose at its slowest pace since the recession ended.

Paul Ashworth, chief UK economist at Capital Economics, said he thought the main reason for the lower-than-expected figure was the fall in defence spending: "We aren't too concerned because the undershoot compared with the 2.5% consensus forecast was largely explained by an unexpected second consecutive quarterly slump in defence spending.

Defence spending fell by 8.1% annualised, after dropping by 12.1% in the fourth quarter of last year."

Camilla Sutton, chief currency strategist at Scotia Capital, said there was good and bad in the numbers: "Personal consumption was positive. But overall [the figure was] weaker-than-expected GDP.

"It does open the door for the Fed to remain dovish."

The US central bank, the Federal Reserve, said this week it was happy with its current policy, although there is speculation that the bank may undertake a third round of quantitative easing, referred to as QE3.

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