U.S. economy appears weaker ahead of jobs report

By Martin Crutsinger

Associated Press

Published: Thursday, May 31 2012 2:23 p.m. MDT

"This throws some cold water on the view that state and local governments have already bitten the bullet and are now likely to add to, rather than subtract from, growth in 2012," said Diane Swonk, chief economist at Mesirow Financial.

Government spending at all levels fell last year. That subtracted nearly a half of a percentage point from 2011 growth, which was 1.7 percent.

Joel Naroff, chief economist at Naroff Economic Advisors, said the economy would be growing at least a full percentage point faster if governments were spending at the rate they normally do three years into a recovery.

"Fiscal austerity comes at a price whether you are talking about the United States or Europe," Naroff said. "In the United States, we are taking moderate growth and turning it into sluggish growth."

Analysts think the economy is growing at a slightly faster rate this spring. Hiring has been steady and gas prices are lower, allowing consumers to spend more freely. Consumer spending drives 70 percent of economic activity.

And more demand from consumers leads businesses to step up restocking. When companies order more goods, it increases factory production and boosts growth.

Economists foresee growth at an annual rate of between 2 percent and 2.5 percent in the April-June quarter. Many expect the economy will maintain that pace for all of 2012.

Still, growth of 2.5 percent typically generates only enough jobs to keep pace with population changes. Most economists say it takes almost twice as much growth to boost hiring enough to lower the unemployment rate by 1 percentage point over a year.

The unemployment rate has fallen a full percentage point since August — from 9.1 percent to 8.1 percent last month. Part of the reason for the drop is that employers added 1.5 million jobs in that time. But another reason the rate has fallen so fast is that some people have grown discouraged and given up looking for work. The government counts people as unemployed only if they're actively looking for a job.

In a more encouraging development, major retailers reported bigger-than-expected sales gains in May compared with a year ago. Consumers bought more clothing and took advantage of Mother's Day promotions. The modest but healthy gains followed a dismal showing in April.

During the January-March quarter, consumer spending grew at an annual rate of 2.7 percent. While that was the fastest pace since the end of 2010, it was down from the initial estimate of 2.9 percent.

Jennifer Lee, senior economist at BMO Capital Markets, pointed out that some components of GDP were revised higher. Among them was housing, which is beginning to show signs of a modest recovery.

Another positive development this month: Gas prices have fallen sharply.

A gallon of regular unleaded has dropped by 32 cents since peaking in the first week of April. U.S. retail gasoline prices fell Thursday to $3.62 a gallon, according to auto club AAA.

Experts see gas falling to at least $3.50 by July 4.

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