Despite weak Q1, sizzling U.S. GDP forecasted for Q2

U.S. economic growth in the first quarter was revised down to a lacklustre 2% — a sharp deceleration and the poorest showing in a year. But economists expect a significant rebound in the current quarter, forecasting a sizzling growth rate of 4% or more.

The Commerce Department said Thursday in its final estimate for the January-March quarter that gross domestic product, the country’s total output of goods and services, was even weaker than previously thought. Lower numbers from consumer spending and business inventories helped trim 0.2 percentage points off last month’s estimate that GDP had grown 2.2% in the January-March period.

But recent economic reports, including consumer spending, have looked strong and point to far better growth in the April-June quarter.

A GDP forecasting gauge produced by the Federal Reserve’s Atlanta regional bank is projecting GDP growth of 4.5% this quarter, an estimate that is in line with many private forecasters. That would be the strongest GDP performance since a 5.2% gain in the third quarter of 2014.

Read: U.S. growth revised down to 2.2% in Q1

The first quarter GDP figure is a notable slowdown from 2.9% GDP growth in the fourth quarter and gains above 3% in the second and third quarters of 2018.

President Donald Trump has often cited this string of strong GDP numbers as evidence that his economic program of deregulation, tax cuts and strong enforcement of trade deals is working. However, private economists believe that the current economic boost from the $1.5-trillion tax cut that Congress approved in December will be short-lived.

Sung Won Sohn, chief economist at SS Economics in Los Angeles, said he is forecasting growth this year and next year of close to 3% but then a slowdown to less than 1% in 2020.

“We are boosting economic activity artificially now so there will be a payback in the future,” Sohn said. Some analysts believe the weakness in 2020, a presidential election year, could be severe enough to raise the prospects of a recession.

The administration is not forecasting any slowdown, projecting annual GDP growth will rise to 3% and stay there for the rest of the decade.

The first quarter figure primarily reflected weaker consumer spending, which slowed to growth at a rate of just 0.9%, the worst showing since the spring of 2013. However, that slowdown followed a 4% surge in spending in the fourth quarter. Analysts believe consumer spending, which accounts for 70% of economic activity, has accelerated in the current quarter.

Businesses were more restrained in re-stocking inventory. That also held back growth in the first quarter.

The nation’s trade deficit was a slight drag on growth in the first quarter as export growth slowed. Government spending at both the federal and state and local levels boosted growth, though not as strongly as in the fourth quarter.

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