Economy in U.S. grew less than projected in first quarter

Income Slumps

Disposable income adjusted for inflation fell at an 8.6% annualized rate, the biggest drop since the third quarter of 2008. The decrease reflects the increase in the payroll tax.

The smaller gain in spending helped boost the saving rate to 2.5% in the first quarter, compared with an initial estimate of a 2.3%.

Businesses such as 3M Co., a St. Paul, Minnesota-based manufacturer, are among those seeing steady household demand. Consumers are spending on home improvement in addition to purchases of products such as Post-it Notes and Scotch Tape, according to 3M’s Chief Financial Officer David Meline.

“We do expect some modest improvement as we go through the year based on a view that the economy is going to continuously show some improving resilience,” Meline said at a June 12 conference.

Fiscal Policy

Sustained gains would allow the economy to better cope with the fallout from $85 billion in fiscal tightening and the lagged effect from a two percentage-point jump in the payroll tax that went into effect at the start of 2013.

Given the restraints, growth will cool to a 1.7% pace this quarter before advancing at a 2.3% in the last three months of 2013 as the fiscal headwinds fade, according to the median forecast of economists surveyed by Bloomberg this month.

Federal Reserve forecasts for growth this year and next are more optimistic than those in the Bloomberg survey. The central bank will probably taper its $85 billion in monthly bond buying later in 2013 and halt purchases around mid-2014 as long as the economy performs in line with its projections, Chairman Ben S. Bernanke told reporters on June 19 after policy makers’ two-day meeting.

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