US GDP growth slows in Q1 but better-than-expected at 2.3%

GDP grew by an estimated 2.5 percent in October-December Growth in the world's largest economy slowed sharply in the first three months of the year amid a decline in exports, consumer spending and home buying, the Commerce Department announced
AFP

Washington (AFP) – The US economy slowed sharply in the first three months of the year amid a decline in exports, consumer spending and home buying, the Commerce Department announced Friday.

But the result was better than feared as economists were expecting the first quarter to be even weaker, following the trend of recent years, despite the boost from sweeping tax cuts in December.

The outcome — which is subject to significant revision in the coming months — suggested the current economic expansion was uninterrupted, which could offer the White House a measure of relief that more dire predictions were not been borne out.

GDP expanded by 2.3 percent in the January-March period, according to a preliminary estimate, down from 2.9 percent in the final months of 2017. But growth was two tenths of a point better than a consensus forecast among economists.

Economists say statistical anomalies may account for some of the weakness, meaning growth in the first quarter may have been stronger than it appeared.

President Donald Trump has vowed to return the United States to three percent annual growth or higher, and is banking on a juiced economy to produce higher government revenues and offset the $1.6 trillion cost of the tax cuts.

Economists say however the current pace of growth is likely above potential, making sustained growth of three percent unrealistic.

– Storm-related distortions –

The Federal Reserve is not expected to raise interest rates at a periodic meeting on monetary policy next week but the overshoot on growth — and signs of rising prices and wages also published Friday — could add to pressure on the central bank to tighten policy more quickly.

Ian Shepherdson of Pantheon Macroeconomics said the aftermath of last year’s late-summer hurricanes “dominated” the first-quarter results. Consumer spending dialed back after the unsustainable gains from rebuilding efforts in the prior quarter.

“The average for the two quarters, two percent, is in line with the prior trend,” he said in a client note. But “government spending will strengthen as the fiscal stimulus kicks in.”

Consumer spending had its slowest quarter in more than four years, rising 1.1 percent, after a jump of four percent in the prior quarter when natural disasters in the southern and western United States drove a boom in purchases of retail goods and supplies.

Consumers bought fewer cars and less clothing and footwear in the winter months while also spending less on food and drink, according to the report. And real estate brokers saw a dip in commissions in the tight housing market. 

Spending by state and local governments slowed, rising just 0.8 percent after a 2.9 percent jump in the prior quarter, and exports also fell.

This was partly offset by higher spending on business inventories, which companies ran down as they raced to meet consumer demand following the back-to-back hurricanes and the devastating California wildfires.

Economists expect a rebound in the second quarter to three percent or higher, as the data work to make up for downward distortions in the first quarter.

“Economic indicators on the housing market and consumer sectors were broadly healthy in March, setting up a favorable starting point for second-quarter activity,” Mickey Levy of Berenberg Capital Markets said in research note.

– Inflation rising? –

“We expect growth to rebound by 3.7 percent annualized in the second quarter, putting near-term GDP growth close to its three percent trend.”

Meanwhile, a closely-watched measure of inflation, the “core” Personal Consumption Expenditures price index, which strips out volatile food and fuel prices, had its strongest quarter in more than 10 years, rising 2.5 percent.

That was six tenths faster than the fourth quarter, and put the rate above the Federal Reserve’s two percent target for the first time in two years.

Meanwhile, the Labor Department report on the Employment Cost Index showed wages and benefits for civilian workers rose 0.8 percent in the first three months of the year, marginally faster than expected.

Market watchers and economists say it is increasingly likely the Fed will have to raise interest rates a total of four times this year to prevent the long-awaited return of inflation.

Wall Street, which had reacted nervously to the prospect of rising interest rates, opened the day higher on blowout earnings from Silicon Valley firms but had turned negative by mid-morning.

.