WASHINGTON -- The government says the economy grew at a 3.2 percent pace during the first quarter of this year, significantly lower than the 5.6 percent of the fourth quarter 2009 despite continued increases in federal spending.
The Commerce Department's initial estimate of the economy's performance in the January-to-March quarter, released Friday, provided more evidence that the economy is strengthening, largely due to the fact consumer spending rose by the most in three years.
They increased their spending at a 3.6 percent pace, the strongest showing since early 2007 -- before the economy tipped into a recession. That marked a big improvement from the fourth quarter when consumer spending grew at a lackluster 1.6 percent pace. However, personal consumption represented 70.7 percent of GDP, only 0.1 percent more than fourth quarter 2009 and down from the record high of 71.3 percent in the third quarter of 2009.
In the first quarter, consumers spent more on things like home furnishings and household appliances, recreational goods and vehicles, clothing, and going out to bars and restaurants.
Spending by businesses on equipment and software rose at a brisk 13.4 percent pace, following an even bigger 19 percent growth rate in the fourth quarter.
Growth was held back by net exports and a decline in government spending, which has fallen in three of the last four quarters. Problems in the real estate market also slowed economic activity.
Builders once again trimmed spending on housing projects, following two quarterly gains. Spending on commercial real estate ventures plunged at a 14 percent pace, the seventh straight quarterly decline.
Looking ahead, analysts say consumers will be wary of stepping up spending much further. The unemployment rate is high at 9.7 percent and is expected to stay elevated in the months ahead. Sluggish income growth and problems getting loans could restrain shoppers' appetite to spend, they say.
"The economy is moving ahead at a decent pace. That's good. But there are headwinds out there for consumers that probably will restrain growth going forward. Are those headwinds going to disappear any time soon? My guess is no," said Joel Naroff, president of Naroff Economic Advisors. He predicts consumer spending will slow in the current April-to-June quarter to about a 2 percent pace.
Mark Lieberman, a senior economist at Fox Business Network, said the positive report is an affirmation of some elements of the American Recovery and Reinvestment Act, which boosted household incomes through tax cuts and jobs programs which increased household spending.
The federal government increased spending at a 1.4 percent pace, after being flat in the prior quarter. But when local and state government spending is included,all government spending for the quarter fell 1.8 percent.
Speaking from the Rose Garden President Obama said the economy is stronger, but until people who want a job get one, the economy isn't back to where it should be.
"While today's GDP report is an important mile post on our road to recovery it doesn't mean much to American who has lost his or her job and can't find another. For millions of Americans our friend's neighbors and fellow citizens ready and willing to get back to work, 'You're hired' is the only economic news they're waiting to hear," he said.
Ahead of the president's remarks, Commerce Secretary Gary Locke said the economy is turning around, but Wall Street reform is an essential part of helping Americans regain jobs and a hold on their finances.
"The president is committed to enacting changes that hold Wall Street accountable and provide strong consumer protections. In the aftermath of an economic crisis that put more than 8 million Americans out of work, and wiped out family savings and assets, the American people deserve and expect nothing less," he said.
Lieberman noted that in promoting the stimulus program, White House Economists Christina Romer and Jared Bernstein argued that "a 1 percent increase in GDP corresponds to an increase in employment of approximately 1 million jobs.
Growth would have to equal 5 percent for all of 2010 just to lower the average jobless rate for the year by 1 percentage point. The outlook for moderate growth this year means unemployment will stay in the 9 percent range by the November congressional elections. The prospects for high joblessness are a political liability for incumbent Democrats and Republicans.
Lieberman said several concerns persist, primarily that inventory investment may have been overestimated.
"Economic activity expanded moderately in the first quarter, but could be built on quicksand. Much of the strength was due to the inventory re-build with perhaps unsustainable growth in consumer spending. Pent-up demand will be tempered by the realities of spent-out wallets," Lieberman said.
"The dearth of construction -- both residential and non-residential -- will continue to pressure that sector specifically as well as supporting manufacturing sectors," he added.
Just 21 percent of Americans consider the economy in good condition, according to an Associated Press-GfK Poll conducted April 7-12.
The first quarter's reading on gross domestic product was a tad shy of the 3.4 percent growth rate economists were forecasting. GDP measures the value of all goods and services -- from machinery to manicures -- produced within the United States. It is the best barometer of the nation's economic health.
Despite pockets of weakness, multiple signals suggest the U.S. economy has turned a corner.
A rising number of companies -- from Ford, Caterpillar and Whirlpool to UPS, Estee Lauder and Royal Caribbean Cruises -- are seeing profits grow. General Electric says the "clouds are breaking" after having suffered one of its worst years in 2009.
By his best bet, Federal Reserve Chairman Ben Bernanke says the economy will log moderate growth.
Economists in a recent AP Economy Survey predict the economy will pick up some speed, growing at a rate of 3.7 percent in the April-to-June quarter.
For 2010 as a whole, economists in the AP survey predict the economy will grow 3.1 percent. That's an improvement from the 2.4 percent decline in 2009, the worst since 1946. But much stronger growth in the 5 percent range is needed for a full year just to drive down the unemployment rate by just 1 percentage point.
The Associated Press contributed to this report.