April 29th, 2011

The economy slowed sharply in the first three months of the year, and more people sought unemployment benefits last week, the second rise in three weeks.

The economy in the first quarter was hampered 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 gross domestic product, the broadest indicator of the economy, grew at a 1.8% annual rate in the January-March quarter. That was weaker than the 3.1% growth rate for the October-December quarter and the worst showing since last spring when the European debt crisis slowed growth to a 1.7% pace.

However, 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% pace in each of the next three quarters, a sign the job market’s recovery is slow and uneven.

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.

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% pace. That was down from a 4% pace in the prior quarter and was the weakest pace since last summer. Consumer spending is important because it accounts for roughly 70% of overall economic activity.

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

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% annualized pace, the deepest cuts since late 2009.

Home building also was hurt. Builders cut spending on housing projects by a 4.1% 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%, the most since the end of 2005.

In another report, the Labor Department said that new claims for unemployment benefits jumped 25,000 to a seasonally adjusted 429,000 for the week ending April 23. That’s the highest total since late January.

The four-week average of applications, a less volatile measure, rose to 408,500, its third straight rise and the first time it has topped 400,000 in two months.

Applications near 375,000 are consistent with sustained job creation. Applications peaked during the recession at 659,000.

New unemployment claims had trended down for about six months, but have leveled off in recent weeks.

More than 3.6 million people are receiving unemployment benefits from regular state unemployment programs. Millions more are receiving aid under emergency programs put in place by Congress during the recession. All told, 8.2 million people obtained unemployment benefits in the week ended April 9, the latest data available. That’s a drop of about 100,000 from the previous week.