U.S. Q1 growth slowed but still beat expectations

The U.S. economy slowed to a moderate 2.3% annual growth rate in the first quarter as consumer spending turned in the weakest performance in nearly five years. Still, the January-March increase came in better than expected, supporting hopes for a solid rebound for the rest of the year.

The Commerce Department reported Friday that the gain in the gross domestic product, the economy’s total output of goods and services, followed a 2.9% rise in the fourth quarter and gains above 3% in the previous two quarters.

Many economists had forecast that growth would slip below 2% in the first quarter, reflecting a big pullback by consumers after a torrid pace of spending in the fourth quarter. Recent history has shown a pattern of weakness in the first quarter, reflecting in part seasonal data quirks. Analysts expect growth to surpass 3% in the current quarter.

Consumer spending, which accounts for 70% of economic activity, decelerated sharply from a 4% growth rate in the fourth quarter to a 1.1% pace in the first quarter. That was offset somewhat by gains in inventory building by businesses and a lower trade deficit.

Analysts viewed the first quarter slowdown as temporary, with consumers expected to boost their spending amid a low unemployment rate and the initial impact of the US$1.5 trillion in tax cuts that Congress approved in December.

Read: U.S. retail sales rebounded a solid 0.6% in March

Over the past four quarters, GDP growth has averaged 2.9%, just below the 3% projection the Trump administration used in its budget for next year.

While the administration expects the economy to grow at rates of 3% for the rest of this decade, private analysts are less optimistic. They say that growth will be bolstered by the tax cuts and increased government spending for this year and next year. But then they expect growth levels to return to the lacklustre rates of around 2% as the boost from fiscal stimulus wears off and the economy starts to feel the adverse effects of rising interest rates.

The Federal Reserve is expected to keep lifting its key interest rate to prevent unwanted inflation, and big federal budget deficits are likely to push up government borrowing costs.

“Growth rates around 3% are not sustainable but for the next couple of years all the government stimulus is going to provide a lot of economic juice,” said Mark Zandi, chief economist at Moody’s Analytics.

The Trump administration disagrees, believing that its program of corporate and individual tax cuts, regulatory reform and tougher enforcement of trade laws will lift the economy to sustained levels of higher economic growth. Private economists, however, are worried that these efforts will run up against weak growth in the labour force as many baby boomers retire and lacklustre gains in productivity.

In its global outlook for Q2 2018, Scotiabank Economics is forecasting U.S. real growth of 2.6% for the year. The bank also raised its growth outlook for 2019 from 2.2% to 2.4% because of the federal tax cuts and spending increases.

Scotiabank expects growth in 2018 and 2019 to be “dampened somewhat by the widening of U.S. trade deficit as the fiscal stimulus is expected to drive aggregate consumption growth ahead of aggregate savings.” The bank expects growth to slow significantly in 2021–22, partially because of rising interest rates.

Read: Is U.S. inflation on the rise?

Since the end of the Great Recession in mid-2009, the economy has turned in modest quarterly growth rates averaging just 2.2%, the weakest expansion in the post-World War II period. The slow pace has helped extend the life of the current expansion, now the second longest in U.S. history. If it lasts through June of 2019, it will become the longest expansion in history, surpassing the 10-year recovery of the 1990s.

Friday’s report is the government’s first of three estimates of first-quarter GDP.

For the first quarter, the slowdown in consumer spending was offset by strength in business investment, which grew at a 6.1% rate, reflecting strong gains in oil and gas exploration, and by business inventory rebuilding, which added 0.4 percentage points to growth. A narrowing of the trade deficit added 0.2 percentage points to growth after it had subtracted 1.2 percentage points from growth in the fourth quarter.

Government spending grew at a 1.2% rate, down from a gain of 3% in the fourth quarter, as spending by state and local governments slowed.

Housing construction, which had surged in the fourth quarter after two quarters of declines, was flat in the first three months of this year.

Also read:

U.S. consumer confidence intact, despite slip

Why volatility shouldn’t scare investors—and what should