Gas prices, bad weather slow the economy

WASHINGTON (AP) — The economy slowed sharply in the first three months of the year as high gas prices cut into consumer spending, bad weather delayed construction projects and the federal government slashed defense spending by the most in six years.

The Commerce Department said Thursday that the economy grew at a 1.8 percent annual rate in the January-March quarter. That was weaker than the 3.1 percent growth rate for the October-December quarter. And it was the worst showing since last spring when the European debt crisis slowed growth to a 1.7 percent pace.

Federal Reserve Chairman Ben Bernanke and other economists say the slowdown last quarter is a temporary setback. They generally agree that gas prices will stabilize and the economy will grow at a 3 percent pace in each of the next three quarters.

But gas prices are still going up. The national average on Thursday was $3.88 a gallon, an increase of 30 cents from a month ago when the first quarter ended.

An inflation gauge in the report showed consumer prices rose last quarter at the fastest pace in nearly three years, with most of the increase coming from higher fuel costs.

Rising gas prices are draining most of the extra money that Americans are receiving this year from a Social Security payroll tax cut.

In the January-March quarter, consumers boosted spending at a 2.7 percent pace. That was down from a 4 percent pace in the prior quarter and was the weakest pace since last summer. Consumer spending is important because it accounts for roughly 70 percent of overall economic activity.

Pump prices were mostly blamed for the pullback, although harsh winter weather also kept people from shopping.

"All things considered, it could have been worse," said economist Paul Dales at Capital Economics. Even though consumers spent less, the pace of spending by historical standards is decent.

Winter storms — including rare snow that blanketed the South — also forced builders to delay construction projects, a big factor holding back overall economic activity. Builders slashed spending on commercial construction, such as office buildings and factories, at a 21.7 percent annualized pace, the deepest cuts since late 2009.

Home building also was hurt. Builders cut spending on housing projects by a 4.1 percent annualized rate.

Bernanke at a news conference on Wednesday suggested that the crippled housing market will continue to weigh on the economic recovery. He pointed out that home building and commercial construction were both "very weak" in the first quarter. Normally, construction spending is a big part of economic recoveries.

The housing market's collapse thrust the economy into a deep recession, and economists say it will take years for the industry to heal. Two years after the recession has ended, the housing market remains depressed.

That's one of the reasons why the United States is experiencing a relatively slow recovery, Bernanke explained.

Another factor holding back the economy last quarter: Deep cuts by the federal government on military projects. That spending was cut by an annualized rate of 11.7 percent, the most since the end of 2005.

Bernanke and other economists expect government defense spending and consumer spending will rebound in the next quarter.

"Most of the factors that account for the slower growth in the first quarter appear to us to be transitory," Federal Reserve Chairman Ben Bernanke said at a news conference Wednesday.

Economists in a new Associated Press survey predict the economy is growing at a 3.2 percent pace this quarter and that growth will steadily improve over the remainder of the year.

An inflation gauge tied to the report showed that consumer prices rose sharply last quarter.

Prices rose at an annual rate of 3.8 percent, the most since the summer of 2008, when gasoline prices hit a record high of $4.11 a gallon nationwide. But stripping out energy and food prices, inflation rose at a rate of 1.5 percent. That's at the low end of the range of inflation the Federal Reserve believes is needed for a healthy economy.