U.S. economy expands 3.2 percent in first quarter;
growth details weak
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[April 27, 2019]
By Lucia Mutikani
WASHINGTON (Reuters) - U.S. economic growth
accelerated in the first quarter, but the burst in growth was driven by
a smaller trade deficit and the largest accumulation of unsold
merchandise since 2015, temporary boosters that are seen weighing on the
economy later this year.
The surge in growth reported by the Commerce Department on Friday put to
rest fears of a recession, that were stoked by a brief inversion of the
U.S. Treasury yield curve in March. But it also exaggerates the health
of the economy as consumer and business spending slowed sharply, and
investment in homebuilding contracted for a fifth straight quarter.
Gross domestic product increased at a 3.2 percent annualized rate in the
first quarter, the government said in its advance GDP report. Growth was
also driven by increased investment in roads by local and state
governments.
"The gain in first-quarter GDP would seem to make a mockery of claims
that the U.S. economy is slowing as the fiscal stimulus fades," said
Paul Ashworth, chief U.S. economist at Capital Economics in Toronto.
"Looking beyond the headline number, however, there are plenty of causes
for concern."
The economy grew at a 2.2 percent pace in the October-December period.
Economists polled by Reuters had forecast GDP increasing at a 2.0
percent rate in the first three months of the year. The economy will
mark 10 years of expansion in July, the longest on record.
President Donald Trump cheered the economy's performance in the first
quarter. "This is far above expectations or projections," Trump tweeted.
The White House has sought to boost growth through an array of policies,
including a $1.5 trillion tax cut package passed in December 2017.
Economists believe the fiscal stimulus, which also included more
government spending, peaked in the third quarter.
They expect GDP to slow this year, with annual growth forecast around
2.5 percent, below the Trump's administration's 3 percent target. The
economy missed the growth target in 2018.
Excluding trade, inventories and government spending, the economy grew
at only a 1.3 percent rate in the first quarter, the slowest since the
second quarter of 2013. This measure of domestic demand increased at a
2.6 percent pace in the October-December quarter.
A gauge of inflation tracked by the Federal Reserve increased at a 1.3
percent rate last quarter. Fed policymakers are likely to shrug off the
last quarter's growth spurt and focus on the weak domestic demand and
inflation when they meet next week.
The U.S. central bank recently suspended its three-year monetary policy
tightening campaign, dropping forecasts for any interest rate increases
this year. The Fed raised borrowing costs four times in 2018.
"The Fed will focus on the composition of growth, which points to a
slowing trend amid softening inflation," said Joe Brusuelas, chief
economist at RSM in New York. "This data reinforces the prudent pause
the Fed is engaged in."
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An aerial photo looking north shows shipping containers at the Port
of Seattle and the Elliott Bay waterfront in Seattle, Washington,
U.S. March 21, 2019. REUTERS/Lindsey Wasson
The dollar dropped against a basket of currencies as investors fretted over the
weak details of the GDP report. U.S. Treasury prices rose, while stocks on Wall
Street were mixed.
BUSINESS SPENDING STALLS
Exports surged and imports declined in the first quarter, leading to a small
deficit that added 1.03 percentage points to GDP after being neutral in the
fourth quarter. Trade tensions between the United States and China have caused
wild swings in the trade deficit, with exporters and importers trying to stay
ahead of the tariff fight between the two economic giants.
The standoff has also had an impact on inventories, which increased at a $128.4
billion rate in the first quarter, the strongest pace since the second quarter
of 2015. Inventories increased at a $96.8 billion pace in the October-December
quarter. Part of the inventory build was because of weak demand, especially in
the automotive sector, which is expected to weigh on future production at
factories.
Inventories contributed 0.65 percentage point to first-quarter GDP after adding
one-tenth of a percentage point in the October-December period.
Growth in consumer spending, which accounts for more than two-thirds of U.S.
economic activity, slowed to a 1.2 percent rate from the fourth quarter's 2.5
percent rate. The moderation in spending reflected a decline in motor vehicle
purchases and other goods, likely related to a 35-day shutdown of the federal
government. There was also a slowdown in spending on services.
The government said the shutdown had subtracted three-tenths of a percentage
point from GDP last quarter. Retail sales have since rebounded strongly,
pointing to some acceleration in consumption in the second quarter.
"Momentum in consumer spending picked up toward the end of the first quarter,
which augurs well for a better consumption outcome in the second quarter," said
Michael Feroli, an economist at JPMorgan in New York. "Even so ... we continue
to expect GDP growth to step down to a 2.25 percent pace in second quarter."
Business spending on equipment braked sharply, rising at only at a 0.2 percent
rate, the slowest since the third quarter of 2016. Spending was held down by
weak outlays on agricultural machinery and office furniture. Investment in
structures contracted for a third straight quarter.
Residential construction fell at a 2.8 percent rate, marking the fifth straight
quarterly decline. Government investment rebounded at a 2.4 percent rate, driven
by spending at state and local governments. Federal government spending was
flat.
(Reporting by Lucia Mutikani; Editing by Paul Simao)
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