Stocks, bonds surge as US economy first quarter growth cut to 1.8%

WASHINGTON - Agence France-Presse

Trader Sean Spain works on the floor of the New York Stock Exchange, June 24. Traders in the U.S. dumped stocks, bonds and commodities, prompted by signs of distress in China's economy and worries about the end of the Federal Reserve bank's easy money policies. AP photo

The U.S. economy grew at a pace of just 1.8 percent in the first quarter, the Commerce Department said June 26, in a sharp downward revision that sent bonds and stocks higher on hopes of more stimulus from the Federal Reserve.

Consumer spending and trade were both much slower than previously estimated as the weak spot that began in late 2012 persisted into the new year amid a rise in payroll taxes and cuts in government spending.

The final revision of the growth data surprised economists, who had expected that the preliminary picture of a stronger rebound in the January-March period, with growth running at 2.4 percent, would be unchanged.

Consumer spending grew only 2.6 percent in the quarter, compared to the previous estimate of 3.4 percent, shaped in part by an 8.6 percent contraction in disposable personal income.

Trade in both directions contracted, against previous estimates that imports and exports had grown. Exports shrank 1.1 percent in the quarter, and imports - which act to lower growth in GDP calculations - contracted 0.4 percent.

Government spending cuts also pulled GDP lower: the federal government's contribution to growth contracted by 8.7 percent, while for state authorities the contraction was 2.1 percent.

The numbers reflected the persistent drag on the economy of both tight government and personal spending, which held back the rebound from the final quarter of 2012, when the pace of growth was only 0.4 percent.

Buyers back in market

Analysts blamed the payroll tax increases that kicked in in January, and fears about government spending cuts introduced in March, that encouraged US households and businesses to hold back.

"This means that income is not driving the economy," said Steven Ricchiuto, chief economist at Mizuho Securities.

Instead, he said, the driver has been the Federal Reserve's $85 billion a month stimulus program, buying bonds to hold interest rates low.

The new data then raises questions about whether the Fed will stick to its forecast, announced last week by chairman Ben Bernanke, that the program could be tapered from later this year and wound up completely by mid-2014 if growth keeps up.

The prospect of tighter money conditions and higher interest rates due to a shrinking stimulus program had sent bond and stock prices sinking.

But data on June 26 supported a longer-term picture for stimulus, and sent buyers back into the markets.

By mid-morning the S&P 500 was up 0.72 percent at 1,599.42, while the yield on the benchmark 10-year Treasury bond was down 0.04 percentage points to 2.54 percent.