Analysis: U.S. Economy Hits Soft Patch, Jobs to Underpin Growth

U.S. EconomyBy Lucia Mutikani

In an echo of early 2010 when the U.S. recovery stumbled, the world's biggest economy appears to have slowed sharply at the start of this year.

A combination of bad weather and rising gasoline prices undercut activity and produced a string of weak economic data, leading some big banks to halve their growth forecasts.

Though economists are anxious about the unexpected slackening, they largely remain confident that the lull will prove just a soft patch and they still expect a strengthening jobs market to revive growth in the next quarters.

"It does look like (first-quarter) growth will be in the neighborhood of 2 percent. There has been a steady dialing down of expectations," said Robert Dye, senior economist at PNC Financial Services in Pittsburgh.

"We are facing increased headwinds from higher oil prices and slower demand from Japan and supply bottle necks."

The government releases its preliminary snapshot of first-quarter growth on April 28.

Early this year, many economists were expecting expansion of about 3.5 percent at an annual rate. Now, some see growth as slow as 1.4 percent, less than half the 3.1 percent logged in the final three months of 2010.

A slew of recent data releases lie behind the sharp cuts, including reports this week on retail sales, business inventories and trade.

A Reuters poll published on Thursday showed economists were looking for first-quarter growth of about 2.5 percent -- a full percentage point lower than in a poll a month earlier. The economists were surveyed before the most recent weak readings of the economy, meaning forecasts may now be lower still.

Retail sales pinched, energy price impact fading

On Wednesday, the government said retail sales recorded their smallest gain in nine months in March, and even that increase was due mostly to rising gasoline prices.

Adjusted for inflation, forecasters expect consumer spending, which accounts for about 70 percent of U.S. economic activity, to grow at only half of the 4 percent rate logged in the final three months of last year.

In what could prove a reprieve for the economy, crude oil prices have leveled out after hitting 32-month highs this week and gasoline prices should do the same.

"We don't expect commodity prices to continue rising at the same pace as in the first quarter," said Michael Gapen, a senior U.S. economist at Barclays Capital in New York.

"Part of the slowdown in real growth was simply a surge in headline inflation that we don't expect to persist into the second quarter."

A government report on Thursday showed some easing in the pressure on the economy from high energy costs. Wholesale prices rose 0.7 percent last month, a steep climb but one that paled when compared with the prior month's 1.6 percent surge.

But some economists worry about headwinds that may prove too strong for growth to recover much in the coming quarters, noting inflation has eroded the boost from payroll tax cuts approved last year as part of a $858 billion stimulus package.

With no political appetite for more spending and the Federal Reserve unlikely to extend its government bond-buying program when it expires in June, potential risks abound. In addition, the impact on the economy from the devastating earthquake and tsunami in Japan remains uncertain.

"The federal government has now shifted from stimulus mode into contraction mode. The debate is now how quickly to cut spending and the deficit," said Nigel Gault, chief U.S. economist at IHS Global Insight in Lexington, Mass.

"This has been and will continue to be a subdued recovery by historical standards."

Although most sectors of the economy showed weakness in the first quarter, manufacturing remained robust. Factories have led the recovery and their momentum give economists confidence the economy will snap back soon.

A firming labor market, despite a surprise rise in new applications for unemployment benefits last week, should help put a sounder foundation under the recovery, economists said.

Employers added 216,000 new workers to their payrolls in March, the biggest gain in 10 months, and the jobless rate fell to a two-year low of 8.8 percent. Economists expect to see a similar pace of job growth in coming months.

"We do expect to see ongoing moderate job growth and that really puts a much firmer foundation under the recovery than we currently have," said PNC Financial Services' Dye.

"We need to see (growth) in the range of 200,000 jobs or so per month on a consistent basis to really bring the consumer back in the game and put a floor underneath housing and re-establish a foundation for ongoing economic expansion. We are in the process of building that foundation right now."

(Reporting by Lucia Mutikani; editing by William Schomberg)

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