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Originally published Friday, April 27, 2012 at 10:30 PM

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Government cuts slow economic recovery

The U.S. economy expanded at a sluggish 2.2 percent annual rate from January through March, but if only private-sector components of the GDP are taken into account, the economy grew at a 3.5 percent annual rate.

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All this title does is stir up hate on us GOP! We are everyday people just like you. ... MORE
Well, what's it going to be. Reduced government spending to reduce the deficit or more ... MORE
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WASHINGTON — The U.S. economy expanded at a sluggish 2.2 percent annual rate from January through March, the government said Friday in a confounding report that spotlighted the continuing challenge of spurring strong growth.

Most forecasters had expected growth in the 2.5 percent to 3 percent range. The disappointing first-quarter number mirrored the closely watched March jobs report, which also fell short by adding only 120,000 jobs after a string of stronger months.

While the headline number for gross domestic product — the sum of goods and services produced in a year — was short of expectations, the report's component parts offered rays of hope. They showed consumption remaining strong in the private sector, while continuing reductions in government spending dampened overall growth.

Federal government spending dropped 5.6 percent, with military spending down 8.1 percent. Spending by state and local government dropped by 1.2 percent. If only private-sector components of the GDP are taken into account, the economy grew at a 3.5 percent annual rate, according to Alan Krueger, head of the White House Council of Economic Advisers.

Continuing losses of state and local government jobs also continue to drag down monthly employment numbers. These trends raise questions about the course of federal budget policies that will be argued throughout this presidential-election year.

"The big declines in defense outlays won't continue, but it does highlight the headwinds from what will be a long period of declining government spending," said Mark Zandi, chief economist for forecaster Moody's Analytics.

Meanwhile, the economy continues to grow, but not robustly.

"This isn't boom times, but it is enough to generate enough jobs to push unemployment slowly lower," Zandi said. "Having said this, growth in the quarter was less than expected, mostly because of sharp declines in defense spending and weak business investment."

The latter numbers highlighted a divide between businesses, which appear to be thriving, and workers. Corporate profits rose by nearly 7 percent in 2011, according to Commerce Department figures, while employee compensation rose less than 5 percent.

Despite the surge in corporate profits, business fixed investment fell 2.1 percent, spending on business structures plunged a whopping 12 percent and spending on equipment was up by a weak 1.7 percent, which partly reflects the end of a tax break for business investment last year.

"Businesses are flush right now, but they are very scared. They are hoarding their cash rather than distributing it in hiring, investment or giving it to shareholders," said Scott Hoyt, senior director of consumer economics at Moody's Analytics.

The weak business spending stood in stark contrast to a 2.9 percent increase in personal-consumption expenditures, which account for about 70 percent of the economy.

"Given corporate profits, you might have hoped for more investment growth," said Bill Craighead, an economics professor at Wesleyan University in Middletown, Conn. "It's acceptable growth in the normal economy, but given how many people are unemployed, it is disappointing."

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