US Q1 growth slows on inventories, weak business spending

Reuters: U.S. economic growth cooled in the first quarter as businesses cut back on investment and restocked shelves at a slower pace, but stronger demand for automobiles softened the blow.

Gross domestic product expanded at a 2.2 percent annual rate, the Commerce Department said on Friday in its advance estimate, moderating from the fourth quarter’s 3 percent rate.

While that was below economists’ expectations for a 2.5 percent pace, a surge in consumer spending took some of the sting from the report and growth was still stronger than analysts’ predictions early in the quarter for an expansion below 1.5 percent.

“There’s nothing catastrophic happening, this is just slow growth and this underscores that the economy is on sound footing but nothing more,” said Steven Baffico, chief executive at Four Wood Capital Partners in New York.

Futures for the broad-based S&P stock index pared gains after the GDP report, while U.S. Treasuries prices turned positive. The dollar extended losses against the yen and fell against the euro.

Although the details were mixed, the GDP report offered a somewhat better picture compared with the fourth quarter, when inventory building accounted for nearly two thirds of the economy’s growth. In the first quarter, demand from consumers took up the slack.

Consumer spending which accounts for about 70 percent of U.S. economic activity, increased at a 2.9 percent rate - the fastest pace since the fourth quarter of 2010. That compared to a 2.1 percent rise in the fourth quarter.

There were other signs of underlying strength, with even home construction rising at its fastest pace since the second quarter of 2010, thanks to the unusually warm winter.

But business spending fell for the first time since the fourth quarter of 2009, with investment in equipment and software rising at its slowest pace since the recession ended.

“It is disappointing that business investment fell, but that could prove temporary,” said Mark Zandi, chief economist at Moody’s Analytics in West Chester, Pennsylvania.

Another drop in government defense spending, which confounded expectations for a strong rebound, also undermined growth.

The report will probably not change views on monetary policy. Federal Reserve Chairman Ben Bernanke on Wednesday expressed comfort with the current stance of Fed policy, but held out the prospect of more bond buying if the economy deteriorated.

The pace of growth remains too soft to offer comfort to President Barack seeking a second-term in office and not enough to significantly bring down the unemployment rate.

Americans stepped up spending on automobiles in the first quarter, with motor vehicle sales rising by the most in four years. Part of that reflected pent-up demand after last year’s earthquake and tsunami in Japan disrupted supplies and left showrooms bereft of popular models.

And encouraged by a spurt in job growth, some households may have replaced older vehicles after tightening their belts during the 2007-09 recession.

Motor vehicle output contributed 1.12 percentage points to first-quarter GDP growth, more than double compared to the prior quarter.

But with the labor market showing early signs of fatigue after employment growth averaged 246,000 per month between December and February, consumer spending could soften in the second quarter.

Some gauges of regional factory activity eased as the second quarter started, and consumer confidence ebbed. In addition, first-time applications for unemployment benefits have spiked in recent weeks, although many economists pin the rise on seasonal quirks.

While the unseasonably warm weather helped the economy by boosting home building and renovations, it undercut demand for utilities, spending at ski resorts and sales of winter apparel.

As a result, weather was probably not the biggest contributor to growth during the quarter.

Inventories also helped GDP growth, just not as much as in the fourth quarter. Inventories increased $69.5 billion after rising $52.2 billion in the fourth quarter.

The change in inventories contributed just over half a percentage point to GDP growth compared to 1.81 percentage points in the fourth quarter.

Excluding inventories, GDP rose at a 1.6 percent rate. In the fourth quarter, the comparable figure was just 1.1 percent.

A broad rise in inflation pressures as energy prices soared also contributed to restraining GDP growth. A price index for personal spending rose at a 2.4 percent rate, accelerating from the fourth quarter’s 1.2 percent pace.

A core measure that strips out food and energy costs advanced at a 2.1 percent rate, also quickening from 1.3 percent in the prior quarter.

With the rise, core PCE has breached the Fed’s 2 percent inflation target.

An increase in exports was offset by a rise imports, causing trade to have virtually no impact on growth.