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Morici: Deceptively Strong GDP Report Expected

NEW YORK ( TheStreet) -- Forecasters expect the Commerce Department to report on Friday that the economy grew a brisk 3.1% in the first quarter. But don't break out the champagne.

Like a corporation with a spruced-up profit statement at a critical shareholder meeting, several one-time factors contributed to this seemingly robust performance. The economy is already slowing, and new crises are threatening.

In the fourth quarter, defense purchases and inventory investments were uncharacteristically weak, and those rebounded in the new year. Also extraordinary, year-end corporate bonuses and dividend payments, intended to soften the blow of higher 2013 taxes, pushed up consumer spending in January and February.

Those factors will not repeat in the second quarter, and January tax increases are finally starting to bite -- consumers appear to have hunkered down, and confidence in the economic outlook is waning.

Higher payroll taxes and income taxes paid by the wealthy took away $165 billion in purchasing power. Working- and middle-class families adjust spending to accommodate higher taxes, but with a lag, because they need to keep driving to work and feeding their children. New car dealers and shopping malls report slowing sales.

For upper-income families, changes in the tax code were extraordinarily complex, and many pay taxes on a quarterly basis on self employment and investment income. The full impact of higher taxes on their after-tax income was not reckoned until their accountants computed their first 2013 tax payment due April 15 -- now they will be trimming purchases, too.

Along with sequestration, higher taxes will subtract more than $200 billion from household purchasing power and government spending, which will slow demand for what Americans make and the growth of GDP while making jobs tougher to find.

A key element of the tax changes -- reduced mortgage-interest deduction -- will dampen existing-home sales. Aided by the Federal Reserve's easy-money policies and a surge of wealthy buyers from Europe's troubled economies, speculative investors have been scarfing up properties in choice markets in Florida, New York City and elsewhere with cash offers that frequently squeeze out ordinary homebuyers seeking a permanent primary residence.

In several markets, prices have zoomed past what these ordinary buyers' incomes will support; hence, speculators' bets require that after-tax household incomes will somehow surge, permitting them to unload at a profit. That is a dubious assumption, and the speculative surge cannot end well. Housing-price increases will slow, plateau or could crash. The housing market bump to household wealth that supported consumer spending in recent months will relent.

Similarly, the Fed's low-interest rate policies are boosting stock and agricultural land values at a pace beyond what future profitability of either asset class should sustain. Either slower=growing values or outright adjustments appear inevitable, and the resulting drag on consumer spending will slow the recovery.

The continuing surge of Chinese exports onto American store shelves along with weakening demand for U.S. products in recession-torn Europe are dampening demand for U.S. products. Japan's weak-yen policy is imposing tougher competition on U.S. automakers and other manufacturers of technology-intensive products. Already, the Commerce Department reported durable goods orders fell 5.7% in March, indicating much slower sales going forward.

The bottom line: Most forecasters expect growth to slow to less than 2% in the second quarter and to remain below 3% through the end of 2014.

Follow @pmorici1

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

Professor Peter Morici, of the Robert H. Smith School of Business at the University of Maryland, is a recognized expert on economic policy and international economics. Prior to joining the university, he served as director of the Office of Economics at the U.S. International Trade Commission. He is the author of 18 books and monographs and has published widely in leading public policy and business journals, including the Harvard Business Review and Foreign Policy. Morici has lectured and offered executive programs at more than 100 institutions, including Columbia University, the Harvard Business School and Oxford University. His views are frequently featured on CNN, CBS, BBC, FOX, ABC, CNBC, NPR, NPB and national broadcast networks around the world.

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