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Economic growth picked up to 2.5 percent last quarter

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Economic growth accelerated from near zero to a 2.5 percent rate in the winter quarter as consumers went on a spending spree, the Commerce Department reported Friday morning.

Consumer spending jumped by 3.2 percent, led by purchases of cars, appliances and other big-ticket items, after growing by 1.8 percent in the fourth quarter.

Housing and business investment spending slowed, however, and the growth rate was dragged down by an 8.4 percent plunge in government spending as the federal bureaucracy geared up for $85 billion of across the board spending cuts that started taking effect mid-quarter on March 1.

"The economy made a solid comeback," drawing strength from a "remarkable" bounce in consumer spending that came in the face of a big increase in payroll taxes at the beginning of the year, said Harm Bandholz, economist at UniCredit Bank. Consumers are feeling wealthier, he said, because of the revival of the housing market in the last year.

The more solid pace of growth last quarter contrasts with anemic 0.4 percent growth posted in the fourth quarter of last year but clocks in closer to the 3.1 percent rate set last summer.

The zigzag pattern of growth seen since last summer is due in large part to the fits and starts of federal defense spending, and the budget wars in Washington. Defense spending plunged by 11.5 percent last quarter after plummeting by 22 percent in the fourth quarter — the largest combined drop in Pentagon spending in almost six decades.

The seesaw effect this has on growth is expected to continue this year. Economists expect another sharp slowdown in growth in the current quarter as the full effects of sequestration hit defense and domestic programs.

"At the moment, it seems as though the U.S. economy has really accelerated," said Yohay Elam, analyst with Seeking Alpha, but "the road seems a bit bumpy" because of the budget wars.

"The expiration of the payroll tax cut and the sequester do seem to counter growth," even when the private economy seems bent on expanding, he said.

"The cuts in government spending already took their toll in the fourth quarter," he said. "What we don't know at the moment is the impact of the sequester" in coming months as Congress and the administration continue their standoff over the budget.

Given the threat to growth from further budget cuts in coming months, Chris Williamson, economist with Markit.com, said Wall Street will be disappointed that growth was not even stronger than 2.5 percent in the first quarter. The economy will need considerable momentum to keep growing in the face of federal cutbacks and tax increases, he said.

"The concern is that growth could weaken again in the second quarter as the economy once again sees a spring swoon," he said, though he added that the winter "upturn represents a substantial improvement on the scrape with near-stagnation" seen in the fourth quarter.

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