USA economy slows in first-quarter, but wage growth accelerates

28 April, 2018, 15:20 | Author: Regina Lloyd
  • News Release: Gross Domestic Product - Bureau of Economic Analysis

Wall Street Journal Global Economics Editor Jon Hilsenrath on first-quarter GDP.

The slowdown in consumer spending in the first quarter offset more positive developments such as continued momentum in business investment and a rise in USA exports.

After topping 3 percent in the second and third quarters of 2016, economic growth slipped to 2.9 percent in the fourth quarter.

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. From 2007-16, first-quarter growth has averaged 1.3 percentage points below growth for the year as a whole, according to a July Federal Reserve study. In the fourth quarter, current-dollar GDP rose 5.3 percent. A key measure of business investment also slowed after a strong fourth quarter, but remained robust.

Mr Trump has gambled that the $1.5 trillion cost of his tax cuts will be repaid in full, or better, through accelerated economic growth.

Economists believe the combination of tax cuts and a tight labor market, which encourages employers to give more favorable pay and benefits to attract and retain workers, should boost spending in the coming months.

Lower corporate and individual tax rates as well as increased government spending will likely lift annual economic growth to the administration's 3 percent target, despite the weak start to the year.

Growth in consumer spending, which accounts for more than two-thirds of USA economic activity, braked to a 1.1 percent rate in the first quarter. Moving forward, real GDP should grow by roughly 3 percent in 2018, which would be the strongest growth rate since 2005.

"It's kind of ironic that we've had a slowdown in consumption and investment just as the tax cuts are taking effect", said Michael Pearce, a senior economist at Capital Economics.

"The biggest question is what's going to happen in the second quarter", said Jacob Oubina, senior USA economist at RBC Capital Markets.

USA economic growth cooled last quarter as consumers pulled back following outsize spending in the prior period, though solid business investment cushioned some of the weakness. The core PCE price index rose at a 1.9 percent pace in the fourth quarter. Economists had expected GDP to increase by about 2.0%. The winter months have historically been the weakest quarter of the year.

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 slowdown in US consumer spending reflected slower auto sales as well as purchases on clothing, footwear, food and beverages, according to the report. The cooling in equipment investment partly reflects a fading boost from a recovery in commodity prices. The decline in spending on vehicles and parts subtracted 0.42 percentage point from growth. Spending is expected to accelerate in the second quarter after the U.S. Congress recently approved more government spending. Inventory values also ballooned to $33.1 billion from $15.6 billion.

Nonresidential fixed investment, or spending on equipment, structures and intellectual property, increased at a still-solid 6.1 percent annualized pace, contributing 0.76 percentage point to growth.


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