US First Quarter Economic Growth Slows Less Than Forecast

Posted April 28, 2018

The GDP price index rose 2 percent in the first quarter.

Consumer spending (which accounts for more than two-thirds of the country's GDP) grew just 1.1 percent in the first quarter of 2018, the lowest rate since 2013. The price index for personal-consumption expenditures increased at a 2.7% pace in the first quarter, matching the fourth quarter's pace.

Rep. Erik Paulson, R-Minnesota and chairman of the Joint Economic Committee, said that Americans are better off today than 16 months ago "thanks to tax reform and pro-growth policies". Other figures April 27 cast a shadow over the strong, synchronized global upswing: Europe's economy lost momentum in the first quarter as expansions slowed from the United Kingdom to France, partly because winter storms ripped through the region.

The $20 trillion economy also turned in a better showing than most recent first quarters, which government reports have struggled to accurately assess because of seasonal issues.

The slight pullback in the pace of business investment from the fourth quarter could have been due to the strong incentives businesses had to invest in the fourth quarter of previous year before the corporate tax rate declined from 35% to 21%.

The pace of America's economic growth slowed in the first quarter, though it remains stronger than economists had predicted. In addition, surveys suggested many workers did not see the tax cut boost to their paychecks until late in the quarter.

"Growth rates around 3 percent are not sustainable but for the next couple of years all the government stimulus is going to provide a lot of economic juice", said Mark Zandi, chief economist at Moody's Analytics. Joseph Lavorgna, chief economist at the investment bank Natixis, points out that GDP revisions are typically quite large, more than a full percentage point on average since 2000. The figure will be revised twice in the next couple of months as more data becomes available.

Beyond quarterly gyrations, underlying demand looks resilient, analysts said before the report.

On the other hand, the growth was indeed stronger than expected. Remember, the US central bank raised interest rates last month in affirmation of the strong economy and labor market and they forecast at least two additional rate hikes this year. As treasury rates move north of three percent, mortgage rates will also rise, dissuading potential home buyers.

Government spending slowed to a 1.2 percent gain from 3 percent, as both federal and state and local outlays cooled.

With Amazon.com and Walmart battling for consumer dollars, lower spending could underscore the challenges facing companies that sell food and household products.

"It is increasingly hard to argue that the 2 percent inflation target hasn't already been breached", said Steven Blitz, chief US economist at TS Lombard in NY. Housing investment was unchanged from the prior quarter after a 12.8% gain.

The Trump administration has promised 3 percent GDP growth or better, due in large part to the tax cuts that were passed late a year ago.

With consumer spending slowing, inventories probably accumulated in the first quarter. Inventory investment contributed 0.43 percentage point to GDP growth after subtracting 0.53 percentage point in the fourth quarter.