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Consumers buying despite slow recovery
Business, government continue to invest more cautiously

The U.S. economic recovery chugged along in the first three months of the year, showing moderate 2.2 percent growth, the Commerce Department reported Friday, thanks largely to consumers who have ratcheted up their spending.

People bought more cars, furniture and clothes, boosting the economy even as businesses invested more cautiously and governments, constrained by post-recession budget woes, cut spending. Consumer spending, which accounts for about 70 percent of the economy, rose 2.9 percent in the first quarter, beating expectations.

"Despite consumer anxiety over gas and food prices that are stretching household budgets, consumers are still spending," Kathy Bostjancic, director for macroeconomic analysis at the Conference Board.

But at least a few signs suggest that consumers are still struggling.

The personal saving rate declined again, to 3.9 percent, meaning that people had less left over from their spending sprees. Their incomes grew but didn't keep up with their rising debt.

Paul Ashworth, chief U.S. economist at Capital Economics, said that personal disposable incomes rose at a rate of 0.4 percent in inflation-adjusted terms.

"That's not sustainable," he said. "You can't continue to drive down the savings rate."

Other new data has highlighted a divide between businesses, which appear to be thriving, and workers. During 2011, corporate profits rose by nearly 7 percent, according to Commerce Department figures released last month. Over the same period, employee compensation rose less than 5 percent.

"Measures of profits are well above their pre-recession peaks," said Scott Hoyt, senior director of consumer economics at Moody's Analytics. "Businesses are flush right now, but they are very scared. They are hoarding their cash rather than distributing it in hiring, investment or giving it to shareholders."

The quarterly report on gross domestic product, the value of all goods and services produced in the United States, is one of the most closely watched measures of the economy, particularly in an election year. Friday's announcement -- of growth, but not rapid growth -- will likely be addressed by both presidential campaigns.

"We don't put too much weight on any individual report but rather what we examine are the longer-term trends, and today's report indicates for the 11th consecutive month we've enjoyed economic growth," said White House deputy press secretary Josh Earnest on Friday. He pointed to "some encouraging data" in the report, including increases in personal consumption, residential home construction and the auto sector.

Economists cautioned that the report is preliminary, as the figures may be revised in the coming months.

Friday's number nonetheless fell below expectations. The economy had been growing at a rate of 3 percent in the last three months of 2011, and economists had been anticipating growth of 2.5 percent or more, surveys showed.

"Following a strong performance at the end of 2011, this most recent growth rate may be called modest, at best," Bostjancic said.

Economists remain divided over the strength of the recovery. Earlier this week, Federal Reserve Chairman Ben Bernanke defended the central bank's wait-and-see approach to the economy, announcing that the Fed would take no new actions to boost growth and would keep interest rates near zero into 2014.

While consumer spending was strong, other aspects of the economy appeared weak. The budget woes at all levels of government continue to hamper growth, according to the Commerce Department report. Federal government spending dropped 5.6 percent, with defense spending down 8.1 percent. Spending by state and local government dropped by 1.2 percent.

Another key reason for the slowdown was a drop in some business investment, particularly in computers and industrial equipment. That was expected, however, because tax advantages for those purchases expired at the end of last year.

Overall, the report signaled that the economy appears to be muddling through despite the economic woes in Europe and $4 gasoline in the United States. It's far from booming but it doesn't seem headed into another recession.

"Not great, but no double-dip," said Ian Shepherdson, chief U.S. Economist at High Frequency Economics.