National output grew at a seasonally adjusted annual rate of 3.2 percent in the quarter, the Commerce Department reported Friday. The economy had increased 5.6 percent in the fourth quarter of 2009 and 2.2 percent in the third quarter.
The steady growth has quelled fears that the downturn is not quite over.
“It’s been a case of, when will they stop worrying and learn to love the boom?” said Robert Barbera, chief economist at ITG, who said that many economists have been too hesitant to acknowledge the steady recovery because the job market is still weak.
At last, consumers were a major contributor to economic growth. Consumer spending grew at an annual rate of 3.6 percent in the first part of the year, after growing at an annual rate of 1.6 percent in the previous three months.
Economic growth at the end of 2009, on the other hand, had been primarily a result of a slower drawing down of companies’ inventories — that is, businesses were not running down their stockroom shelves as quickly as they had been. Inventory growth accounted for about half of the expansion in the first quarter of 2010.
Consumer spending makes up more than 70 percent of the total economy, and it usually drives growth during economic recoveries. Consumers’ lackluster spending last year had worried experts about how sustainable a recovery driven primarily by changes in stockroom shelves could be.
Economists are hopeful that families will continue to pick up the pace of purchasing, although consumers may be hesitant to open their wallets too much further given the tepid growth in job creation and personal income.
“We haven’t had consumer spending growth this strong in three years,” said Nigel Gault, chief United States economist at IHS Global Insight. “But the caveat is that with real disposable incomes not growing, this was all done through the saving rate. We cannot rely on consumers continually driving down their savings. They need income support from hiring.”
Hiring only recently began to turn around, with the economy adding 162,000 jobs on net in March, of which 48,000 were temporary Census-related positions. The economy had destroyed about eight million jobs since the recession began in December 2007.
“Unless the pace of growth picks up significantly we will see high unemployment rates for years to come,” said Josh Bivens, an economist at the Economic Policy Institute, a liberal research organization in Washington.
The unemployment rate has hovered around 10 percent for the last eight months, and most recently was 9.7 percent in March. New numbers will be released by the Labor Department next week.
In the meantime, companies have been enjoying their new customers.
Nate Evans, who owns a pottery-making business with his wife, Hallie, in New Albin, Iowa, said that their sales in 2009 were the worst ever but that they were just starting to see things pick up. The Evanses sell their pottery from their home workshop as well as in galleries in nearby states, and at crafts shows in Wisconsin, Minnesota, Iowa and Illinois.
“I felt like the energy of the crowd was better,” Mr. Evans said of their first fair this year, in Minnesota. As did other crafts sellers, he said. “Most of the people we talked to said it was better than last year. Hey, it’s not great, but it’s better than last year.”
The biggest contributors to consumer spending growth were purchases of durable goods like cars. In addition to consumer spending, exports and nonresidential fixed investment also played a role in overall output growth. Businesses’ purchases of equipment and software, for example, grew at an annual rate of 13.4 percent last quarter, after a 19 percent increase in the last quarter of 2009.
“This is very good news, since it indicates businesses are feeling more confident about the expansion to start spending some of their cash,” Mr. Gault said. “If businesses are spending more on equipment, usually that would go along with more hiring, too.”
Federal government spending, which includes remaining stimulus money, grew at an annualized rate of 1.4 percent in the first quarter of 2010. But this was more than offset by continued cuts from state and local governments, whose spending decreased 3.8 percent. It was the third quarter in a row in which state and local spending fell.
“Government spending contracted, for all the ballyhoo about stimulus,” said John Ryding, chief economist at RDQ Economics. “This recovery is going to have to stand on the backs of private-sector demand, not on government demand, given all the current fiscal challenges.” Even though any pickup in business is welcome, modest improvement may not be enough to alleviate the lasting pain caused by the so-called Great Recession, many economists say.
The nation’s gross domestic product — a broad measure of goods and services produced in the country — is far below its potential, according to economists’ projections of where the economy would have been if it had followed its long-term trend. Output would need to grow at least 5 percent annually for several years to get back on track — and perhaps more importantly, to lead to enough job creation to employ the 15 million Americans already out of work and the 100,000 new workers joining the labor force each month.
Right now, many economists are expecting that the nation’s output will instead expand by just 2.5 percent or 3.5 percent this year.
“The economy is not any longer falling into a hole, but it’s also not getting out of the hole quickly enough either,” said Ian Shepherdson, chief United States economist at High Frequency Economics.