Economists had originally hoped the economy would expand at a brisker pace this year — 3 percent or 4 percent. But across-the-board government spending cuts, which began taking effect March 1, are forcing federal agencies to furlough workers, reducing spending on public projects and making businesses nervous about investing and hiring.
Growth is expected to slow to 2 percent in the April-June quarter.
Budget cuts have already been a drag on the economy. Government spending at the local, state and federal levels fell at an annual rate of 4.1 percent from January through March and 7 percent the last three months of 2012. Normally, government spending contributes to economic recoveries.
The damage from government austerity has been offset in part by the Federal Reserve, which has kept short-term interest rates near zero since the end of 2008 and has been pumping $85 billion a month into the economy by buying bonds.
—CONSUMERS, HOUSING AND THE STOCK MARKET: LOOKING UP
Some of the U.S. economy's fundamentals are looking healthier.
Consumers have shrugged off an increase in their Social Security taxes this year and the budget shenanigans in Washington: From January through March, they spent at the strongest pace in two years. That's good news because consumers account for 70 percent of U.S. economic activity.
Fueled by near-record low mortgage rates, the housing market has been bouncing back. New-home sales in March were up 18.5 percent from a year earlier. Sales of previously occupied homes were up 10.3 percent. For the first time in five years, homebuilders started work on more than 1 million homes in March at a seasonally adjusted annual rate.
Investors have celebrated rising corporate profits and other good news. The Dow Jones industrial average is up 1,870 points, or more than 14 percent, so far this year, including Friday's gain.
Rising stock and home prices help feed consumer spending by making people feel wealthier and more willing to spend.
—EUROPE: MAKING THE U.S. ECONOMY LOOK GOOD
The American economy and job market look a lot better when you compare them with Europe's. Across the Atlantic, governments have been cutting spending and raising taxes even more aggressively. The 17 European Union countries that use the euro currency slid back into recession in the fall of 2011 and have been stuck there since.
Eurozone unemployment hit a record 12.1 percent in March, reaching 27.2 percent in Greece and 26.7 percent in Spain.