American consumers helped propel the U.S. economy to its third straight quarterly gain at the start of 2010, a government report Friday showed.
The Commerce Department said the gross domestic product, the broadest measure of economic activity, grew at a 3.2 percent annual rate in the first quarter as household spending climbed at the fastest pace in three years.
Moreover, growing sales at retailers from Macy's Inc. to Starbucks Corp., combined with additional gains in business investment, show the expansion is broadening.
"You've got an economy going up, and you feel increasingly confident that it is on the upswing," said Neal Soss, chief economist at Credit Suisse in New York. "The economy's balance keeps getting better."
Still, growth was weaker than in the fourth quarter of last year, when the economy grew at 5.6 percent rate.
Consumers powered the first quarter's growth, increasing their spending at a 3.6 percent pace, the strongest showing since early 2007 - before the economy tipped into recession. That marked a big improvement from the fourth quarter, when consumer spending grew at a lackluster 1.6 percent pace.
In the first quarter, consumers spent more on goods like home furnishings and household appliances, recreational goods and vehicles, clothing, and on going out to bars and restaurants.
Even though consumers aren't spending as freely as they normally do early in strong economic recoveries, they are spending sufficiently to keep the economy expanding.
"We're benefiting from a consumer who's feeling just a little bit better," Troy Alstead, chief financial officer of Starbucks, said a week ago after the Seattle announced its quarterly earnings.
Coming off the worst economic contraction since the 1930s, the strength of the rebound over the last three quarters has fallen short of the 7.5 percent gain on average in the nine months after the 1981-82 recession, the last slump to persist for more than a year.
"The recovery looks muted by historical standards," Soss said. Consumer spending is unlikely to be as strong as it was in the 1980s and 1990s, he said.
Looking ahead, analysts believe consumers will be wary of stepping up spending much further. The unemployment rate is high at 9.7 percent and is expected to stay elevated in the months ahead. Sluggish income growth and problems getting loans could restrain shoppers' appetite to spend, they say.
"The economy is moving ahead at a decent pace," said Joel Naroff, president of Naroff Economic Advisors in Holland, Bucks County. "That's good. But there are headwinds out there for consumers that probably will restrain growth going forward. Are those headwinds going to disappear any time soon? My guess is no."
Naroff predicts consumer spending will slow in the April-to-June quarter to about a 2 percent pace.
GDP growth would have to equal 5 percent for all of 2010 just to lower the average jobless rate for the year by 1 percentage point.