US GDP blows past estimates despite slowdown in consumer spending

Posted April 28, 2018

The San Francisco Federal Reserve even published a 2015 report about the "puzzle of weak first-quarter GDP growth" that suggested sluggish data to start the year was more of a statistical problem than a signal of a struggling economy.

Consumer spending, which accounts for more than two-thirds of the economy, grew only 1.1% last quarter, its weakest pace in almost five years.

The GDP report showed the Fed's preferred inflation gauge, the personal consumption expenditures (PCE) price index excluding food and energy, increased at a 2.5 percent rate - the fastest pace since the fourth quarter of 2007.

Another factor may have led to subdued growth figures: First-quarter growth has tended to be weaker than other quarters in recent years, potentially from seasonal quirks in the data that dissipate in subsequent months.

Trump promised during his 2016 campaign to bring about sustained 4 percent or higher GDP growth and create tens of millions of new jobs within his first term in office. The data comes after the fourth quarter a year ago grew 2.9%. "Tax cuts will support consumer spending and business investment", while "trade is certainly a risk".

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USA economic growth slowed moderately in the first quarter, the first preliminary assessment of the health of the economy since Donald Trump signed huge tax cuts into law previous year. According to the Commerce Department's surveys, tax cuts were not reflected on many workers pay until late in the first 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.

Growth in consumer spending, which makes up more than two-thirds of USA economic activity, eased to a 1.1% rate in the first three months of 2018. The economy may expand 2.8 percent in 2018, according to the median of forecasts compiled by Bloomberg, before slowing in the following two years. It also boosted its forecast for 2019 from a meager 1.5% to a respectable 2.4%.

Household outlays increased at a 1.1% rate in the first quarter, pulling back from the fourth quarter, when they rose 4.0% and marking the smallest increase since mid-2013. Economists had expected GDP to increase by about 2.0%.

Trade added 0.20 percentage point to GDP growth as rising exports offset an increase in imports that was driven by royalties and broadcast license fees related to the Winter Olympics.

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Wages and salaries were up 2.7 percent in the 12 months through March compared to 2.5 percent in the year to December. The PCE price index increased 2.7 percent, the same increase as in the fourth quarter.

Investment in homebuilding was unchanged in the first three months of the year, reflecting a decline in brokers' commissions as an acute shortage of properties hurt home sales.

GDP in the United Kingdom grew by just 0.1% for the first quarter as uncertainty over the UK's exit from the European Union next year crimped business investment and weighed on construction. Trade added 0.2 percentage point to growth, while inventories added 0.43 point, a reversal from the prior quarter, when they subtracted a combined 1.69 points.

Trade added 0.20 percentage point to GDP growth as weak a US dollar and strengthening global economy bolstered exports.

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