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GDP Rose 2.5% In Q1; High Point For 2013?

The U.S. economy expanded at a 2.5% pace in Q1, the Commerce Department said Friday, missing forecasts. But that may be as good as it gets in 2013 as businesses see little reason to ramp up investment and hiring.

Analysts expected an annualized GDP gain of 3.1%, though it was still a big improvement over Q4's 0.4%.

Consumer spending growth accelerated to 3.2% from 1.8% despite higher payroll taxes. Inventories recovered, and the decline in government spending eased to 4.1% from 7%.

But business investment's pace slowed to 2.1% from 13.2%, foreign trade was a bigger drag, and growth excluding inventories worsened to 1.5% from 1.9%.

Consumption may have been inflated by high utility spending on unseasonably cold weather. Disposable income fell 5.3% after spiking 6.2% in Q4 on special dividends before the fiscal cliff deal.

"There's nothing in here that bodes really well for the rest of the year," said Dan North, North America chief economist at Euler Hermes.

U.S. stock indexes closed mixed Friday. The housing recovery lifted profits at homebuilder D.R. Horton (DHI) and woods products firm Weyerhaeuser (WY). Residential investment growth slowed in Q1 but advanced by a solid 12.6%.

Fiscal policy uncertainty continues to weigh on businesses, North said. Firms are waiting to see how payroll tax hikes and across-the-board budget cuts will affect demand and are bracing for political fights over the debt ceiling and the next budget.

"There's not a lot of reason to start investing heavily in either capital or people," he said.

The trade outlook is deteriorating too, with manufacturing activity in top economies softening. Industrial giants like GE (GE) and Honeywell (HON) are seeing little or no revenue growth. The S&P 500 is expected to report its second yearly sales decline in three quarters.

Economic growth in Q2 is expected to suffer due to fiscal tightening, before regaining traction later this year.

But GDP excluding inventories doesn't offer much encouragement. That final sales figure rose at a tepid 1.5% pace in Q1. It needs to be a sustained 2.5%-3% to support more hiring and investment, said Allen Sinai, chief global economist at Decision Economics.

"It casts doubt on the ability of the U.S. economy to pick up," he said.

Sinai now sees overall GDP growth looking similar to 2012's 2.2%. Housing will continue to improve, but the sector is a smaller share of the economy than before the bust, and home price gains take a year before spurring more spending, he estimated.