Lingering problems cloud prospects of big economic gains

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WASHINGTON — Higher gas prices, severe storms and belt-tightening at the Pentagon slowed the economy in the first three months of the year. Most economists say the weak January-March growth was a temporary setback that will be followed by stronger expansion the rest of the year.

But will it?

Gas prices keep rising, real estate remains depressed and the federal government seems about to adopt some of the deepest spending cuts in a generation. Those spending cuts will also filter down to state and local governments, already squeezed by their own budget crises.

All of that could drag on the U.S. economy through the rest of the year, despite a pickup in hiring.

“Just about every piston in the engine lost its power during the quarter,” said Sung Won Sohn, economist at California State University. “I don’t think all those negative factors are going to disappear.”

The economy grew at a 1.8 percent annual rate in the January-March quarter, weaker than the 3.1 percent growth in the previous quarter, the Commerce Department said Thursday. It was the worst showing since last spring, when Europe’s debt crisis slowed U.S. growth to a 1.7 percent annual pace.

U.S. growth, as gauged by the gross domestic product, is the output of all goods and services. It’s affected each time someone buys a car, has a manicure, sees a doctor or fills a gas tank.

To calculate GDP, the government adds consumer spending, business investment and government spending — and then subtracts the trade deficit. The United States has a trade deficit because the value of its imports exceeds that of its exports.

A big reason for the slower growth at the start of this year is the sustained surge in gas prices, which is siphoning money away from other purchases, from cars and appliances to clothing and vacations. Unlike other consumer spending, gasoline purchases deliver less benefit for the U.S. economy.

About half the revenue flows to oil-exporting countries through U.S. oil companies and gasoline retailers also benefit.

The rise in gas prices has shown no sign of slowing since the first quarter ended in March. Consumers paid an average of $3.89 for a gallon nationally Thursday. That’s 30 cents more than a month ago and $1.02 more than a year ago.

Federal Reserve Chairman Ben Bernanke and some other economists are downplaying the impact of high gas prices on the economy for the rest of the year. They predict gas prices will stabilize and the economy will grow at a 3 percent pace in each of the next three quarters.

Oil analyst Jim Ritterbusch predicts average gas prices nationally will peak at $4.25 a gallon by the end of May. At that point, he says, people will likely cut back on driving, and gas prices should fall to $3.75 a gallon over the summer. By year’s end, Ritterbusch says prices should fall to $3.25 a gallon.

“We will have some zigs and zags, but that’s where we are headed,” Ritterbusch says.

Sohn isn’t as optimistic. He says gas prices will rise, not stabilize, through the summer because turmoil in the Middle East could spread. That would push prices above $4.50 a gallon nationwide by late summer, he says.

Partly as a result, he expects growth amounting to only about a 2.5 percent annual pace for the rest of the year. At that rate, unemployment, now at 8.8 percent, would likely decline only slowly.

Rising gas prices are draining most of the extra money Americans are receiving this year from a cut in Social Security taxes. That’s the main reason why consumer spending cooled in the January-March quarter.