A lot was going right for the U.S. economy in the first quarter.
Consumers were spending again in spite of a hefty tax hike, the housing industry continued its resurgence and businesses rebuilt depleted inventories.
But that’s already in rear-view mirror as economists start to fret about the rest of the year, worried the U.S. recovery may be stalling again.
“The U.S. economy is starting to look sickly again,” Gluskin Sheff and Associates Inc. chief economist David Rosenberg warned Friday in a research note.
“There is practically no momentum heading into the second quarter.”
The economy likely grew at a healthy three-per-cent annual pace in the first quarter, up sharply from the 0.4 per cent recorded in the final three months of 2012, according to the consensus forecast among economists. The official estimate is due to be released Friday.
But that could be the high water mark for the year. Economists say growth could slow to a sub-two-per-cent clip in the current quarter and do only marginally better through the remainder of the year.
“Part of the strength in the first quarter … will be illusory,” cautioned economist Andrew Grantham of CIBC World Markets.
He pointed out that a large inventory build-up was widely expected after the widespread impact of Hurricane Sandy last year.
Mr. Rosenberg of Gluskin Sheff said productivity is sagging in the U.S., inflating labour costs and sapping profits. And that’s rarely a good sign, he said.
“We are seeing companies having to work their existing staff longer and pay them more,” Mr. Rosenberg remarked.
The so-called sequestration deal in the U.S. Congress will also weigh on the economy as the federal government spends less. Economist also expect that the trade deficit and slower business investment will hold back the economy in first quarter, and beyond. And while the housing construction is going strong again, the non-residential sector is still in a slump.
Many Canadian businesses are counting on a strong U.S. recovery to drive exports. But beyond housing-related products, such as lumber, it’s not clear where the demand will come from south of the border. Coupled with falling commodity prices – and demand – the weaker outlook in the U.S. adds yet another challenge for the Canadian economy.