US first quarter growth weakest in three years as consumer spending falters

Tuesday, 2 May 2017 00:00 - - {{hitsCtrl.values.hits}}

REUTERS: The US economy grew at its weakest pace in three years in the first quarter as consumer spending almost stalled, but a surge in business investment and wage growth suggested activity would regain momentum as the year progresses.

The soft patch at the start of the year is bad news for the Trump administration’s ambitions to significantly boost growth.

Gross domestic product increased at a 0.7% annual rate also as the government further cut defense spending and businesses spent less on inventories, the Commerce Department said on Friday in its advance estimate. That was the weakest performance since the first quarter of 2014.

The pedestrian first-quarter growth pace is, however, not a true picture of the economy’s health. Wage growth in the first quarter was the fastest in 10 years as the labor market nears full employment and business investment on equipment was the strongest since the third quarter of 2015.

Also underscoring the economy’s underlying strength, consumer and business confidence are near multi-year highs. First-quarter GDP tends to underperform because of difficulties with the calculation of data that the government has acknowledged and is working to rectify.

Prices for US Treasuries were narrowly mixed. The dollar was little changed while US stocks were trading marginally lower.

President Donald Trump has pledged to raise annual growth to 4% through infrastructure spending, tax cuts and deregulation. The White House proposed a tax plan that includes cutting the corporate income tax rate to 15% from 35%, but offered no details.

Economists are skeptical that fiscal stimulus, if it materialises, will fire up the economy given weak productivity and labor shortages in some areas. They see growth just above 2% this year.

Growth in consumer spending, which accounts for more than two-thirds of US economic activity, braked to a 0.3% rate, the slowest pace since the fourth quarter of 2009. That followed the fourth quarter’s robust 3.5% growth rate.

A mild winter undercut demand for heating and utilities production. Higher inflation, with the personal consumption expenditures price index averaging 2.4% – the highest since the second quarter of 2011 – was also a drag. Spending also took a hit from government delays issuing income tax refunds to combat fraud.

In a separate report on Friday, the Labor Department said private sector wages jumped 0.9% in the first quarter, the largest increase in a 10 years, after rising 0.5% in the fourth quarter.

With wage growth, business investment and inflation firming, economists believe Federal Reserve officials will look past the weak first-quarter GDP when they meet next week.

Fed Chair Janet Yellen has previously described quarterly GDP as “noisy.” The US Central Bank lifted its overnight interest rate by a quarter of a percentage point in March and has forecast two more hikes this year. It is not expected to raise interest rates next Wednesday.