US economic growth revised lower to 2.4%

The US economy grew at a moderate 2.4 percent annual rate in the first quarter, slightly less than first estimated as sharp cuts in government spending dug in, official data showed Thursday. In the small downward revision from its initial 2.5 percent reading, the Commerce Department said "the general picture of overall economic activity is not greatly changed." The new first-quarter estimate was in line with expectations and confirmed the world's largest economy was chugging along at a pace that, while modest, was still much better than the 0.4 percent growth in the fourth quarter. "The Q1 GDP data continue to paint the picture of an economy with strengthening fundamentals that is facing significant fiscal drag," said Ellen Zentner of Nomura Securities International. Economists have estimated the government's severe "sequester" budget cuts will shave about a half a percentage point from GDP this year. The downward revision for the January-March period was due partly to lowered estimates of exports and government spending. Government belt-tightening to rein in ballooning budget deficits had been ongoing in previous quarters but kicked into higher gear on March 1, the start of the sequester cuts aimed at paring $85 billion in spending through September. All government spending dropped 4.9 percent in the first quarter, while federal spending dived 8.7 percent. A bright spot was an upward revision of consumer spending, the key driver of the US economy. Consumer spending increased 3.4 percent in the first quarter, up from a 3.2 percent initial estimate, reflecting a surge in services spending as utilities use fired up during an unusually cold winter. "Most encouraging is that this month's revision did not erase the 'pop' in services spending, where at 3.1 percent quarter-on-quarter the sector has posted its fastest growth rate since the 2005 second quarter," said Robert Brusca of FAO Economics in a research note. He added: "Yes this IS the job-creating sector!!" Persistently elevated unemployment has led the Federal Reserve to pump massive stimulus into the economy to try to spur growth and create jobs, raising concerns that the spending will cause risky financial imbalances. "The economy is not growing so strongly that those who back the quantitative easing approach would feel comfortable about taking the pedal even modestly off the metal," said Joel Naroff of Naroff Economic Advisors. The Commerce Department also reported a bigger decline in personal disposable income after the January 1 expiration of a payroll tax cut. Disposable income dropped 8.4 percent, much more than the 5.3 percent decline initially estimated. Analysts were divided over the direction of growth. "Overall, this release does not change our expectations for future growth," said Dean Maki of Barclays Research. GDP growth in the second quarter would slow to 1.5 percent, "driven in large part by an expected slowdown in real consumer spending growth," he said. Nariman Behravesh, chief economist at IHS Global Insight, warned that the the sequester will be felt strongest in the current quarter. Still, he said, IHS had raised its second-quarter growth estimate to 1.5-1.6 percent, from 1.4 percent. "The strong dynamics of the US private sector point to an acceleration of growth in the second half, with a 3.0 percent rate achievable by year-end."