US Economy Slows in First Quarter as Consumer Spending Drops

Analysts expected consumer spending growth to slow in the first quarter curbing overall economic growth

MoreCloseclosemoreAnalysts expected consumer spending growth to slow in the first quarter curbing overall economic growth

But he cautioned that the United States economy had "repeatedly swooned" in the first quarter of the year and added that 2.3% was still ahead of most economists' expectations.

Cautious consumer spending, which grew at its weakest pace in almost five years, was blamed for the slowdown.

The price index for gross domestic purchases increased 2.8 percent in the first quarter, compared with an increase of 2.5 percent in the fourth.

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

Analysts expect the first-quarter growth pace to be a bit of an anomaly and not a true reflection of the economy.

The economy grew at a 2.9 percent pace in the fourth quarter.

The slight pullback in the pace of business investment from the fourth quarter could have been due to the strong incentives businesses had to invest in the fourth quarter of a year ago before the corporate tax rate declined from 35% to 21%.

Trump has said his policies, particularly the tax cuts, would raise sustained annual economic growth up to 3 percent or higher from the sluggish 2 percent level that has plagued the recovery from the Great Recession. In addition, surveys suggested many workers did not see the tax cut boost to their paychecks until late in the quarter.

The Trump administration has promised 3 percent GDP growth or better, due in large part to the tax cuts that were passed late previous year.

Growth in consumer spending, which accounts for more than two-thirds of US economic activity, braked to a 1.1 percent rate in the first quarter. 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.

"Right now, consumers are cautious", Navy Federal Credit Union economist Robert Frick said in a note to clients, adding the drop in durable goods spending "points to consumers avoiding big ticket items to conserve cash". Households also boosted savings, which bodes well for a pickup in spending.

Business spending on equipment slowed to a 4.7 percent rate in the January-March quarter after double-digit growth in the second half of 2017.

In CBO's (Congressional Budget Office) projections, the growth of real GDP exceeds the growth of real potential output over the next two years, putting upward pressure on inflation and interest rates. The winter months have been the weakest quarter of the year for several years.

But Trump and Republicans strongly criticized former President Obama for not having a single calendar year in which economic growth hit 3 percent. A measure of inflation, tied to consumer spending and excluding volatile food and energy costs, advanced at a 2.5% annualized pace, the fastest since 2011, adding to signs that price gains are picking up.

At the same time, Boeing said it's seeing solid global demand, while United Parcel Service said the US economy is showing "healthy fundamentals". Inventory values also ballooned to $33.1 billion from $15.6 billion.

The stronger than expected GDP growth reflected positive contributions from non-residential fixed investment, consumer spending, exports, private inventory investment, and government spending.

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