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Government spending cuts hold US Q1 growth to 2.5%

An apartment building under construction in Los Angeles, California on December 11, 2012
A prefabricated housing unit is hoisted and placed on the second floor of the Star Apartments building under construction in Los Angeles, California December 11, 2012. The US economy grew at a pace of 2.5 percent in the first quarter of 2013, with cuts in

The "sequester" spending cuts held back the US economy in the first quarter, the Commerce Department said Friday, with GDP growth coming in at a lower-than-hoped 2.5 percent for the period.

The first estimate of gross domestic product in the January-March period 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, in part because of more sluggish activity in March.

The ongoing revival of the housing sector was one of the key drivers behind the gain, with residential investment rising 12.6 percent.

Consumer spending added 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, enough to diminish the impact of a rebound in private-sector activity.

US GDP
Graphic showing the trend in US GDP growth and Q1 2013 figure.

The $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 federal 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 cuts' impact on first-quarter growth came from an 11.5 percent fall in defense investment and consumption; defense is required to bear half the burden of the sequester cuts.

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 a 0.5 percentage point off growth.

The White House took advantage of the data to renew its call to reel in the sequester cuts, which were driven mainly by Republicans in Congress focused on reducing the deficit.

"Now is not the time for Washington to impose self-inflicted wounds on the economy," said Alan Krueger, chairman of President Barack Obama's Council of Economic Advisers.

Morning traffic on the SR2 freeway in Los Angeles, California on April 25, 2013
Morning traffic pictured on the SR2 freeway in Los Angeles, California on April 25, 2013.

"These arbitrary and unnecessary cuts to government services will be a headwind in the months to come, and will cut key investments in the nation's future competitiveness," he said in a statement.

"The administration continues to urge Congress to replace the sequester with balanced deficit reduction."

Jim O'Sullivan, chief US economist at High Frequency Economics, called the GDP 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 pickup 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 pickup 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.

"While sequestration will slow GDP in Q2, we still expect growth to top 3.0 percent in the second half of the year amid improved household finances, pent-up demand for autos, and the long-running housing market recovery," he said.

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