US economic growth slowed to 2.3 per cent pace in Q1

WASHINGTON – The U.S. economy slowed to a moderate 2.3 per cent 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 per cent rise in the fourth quarter and gains above 3 per cent in the previous two quarters.

Many economists had forecast that growth would slip below 2 per cent 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 per cent in the current quarter.

Consumer spending, which accounts for 70 per cent of economic activity, decelerated sharply from a 4 per cent growth rate in the fourth quarter to a 1.1 per cent 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 $1.5 trillion in tax cuts that Congress approved in December.

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

While the administration expects the economy to grow at rates of 3 per cent 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 per cent 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 per cent 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.

Since the end of the Great Recession in mid-2009, the economy has turned in modest quarterly growth rates averaging just 2.2 per cent, 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 per cent 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 per cent rate, down from a gain of 3 per cent 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.