U.S. growth of 2.3 per cent slows but beats forecasts

The government's first estimate of economic growth at the beginning of 2018 was better than expected: GDP increased at a 2.3 percent annual rate in the first quarter, the Commerce Department said Friday - above Wall Street estimates of 2 percent. In the fourth quarter, real GDP increased 2.9 percent. First-quarter growth is usually slower than the rest of the year, and often ends up being revised higher when it's seasonally adjusted. "Tax cuts will support consumer spending and business investment", while "trade is certainly a risk".

The first quarter slowdown in consumer spending was offset by strength in business investment, which grew at a 6.1 percent rate, reflecting strong gains in oil and gas exploration, and by business inventory rebuilding, which added 0.4 percentage points to growth.

Trade added 0.20 percentage point to GDP growth as weak a USA dollar and strengthening global economy bolstered exports.

Traders seemed to shrug off data showing the annual rate of core consumer price growth surged up to 2.5 percent in the first quarter from 1.9 percent in the fourth quarter. The PCE price index increased 2.7 percent, the same increase as in the fourth quarter.

The Commerce Department report showed a robust contribution from business investment, which rose more than 6 percent. They expect a bounce back in the coming months, and preliminary estimates point to 3.6% growth in the second quarter.

In a separate report in Friday, the Labor Department said wages and salaries shot up 0.9 percent in the first quarter. 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.

In June 2017, the CBO said GDP growth for 2018 would be just 2%.

Trade was likely a drag on GDP growth for a second straight quarter after royalties and broadcast license fees related to the Winter Olympics boosted imports.

The Trump administration's goal of 3% sustained growth, has challenges in an environment of dissipating inflation and borrowing costs not to mention the possible headwinds from recent tariffs on trade.

On the other hand, the growth was indeed stronger than expected. Inventory investment contributed 0.43 percentage point to GDP growth after subtracting 0.53 percentage point in the fourth quarter. Rebuilding and clean-up efforts following hurricanes late past year probably pulled forward spending into the fourth quarter. Employers around the country are reporting difficulty finding skilled workers with the unemployment rate at 4.1 percent and headed lower.

The slowdown in USA consumer spending reflected slower auto sales as well as purchases on clothing, footwear, food and beverages, according to the report. Housing investment was unchanged from the prior quarter after a 12.8% gain.

At the same time, some of the data point to an economy that is still below the 3 percent growth level.

In contrast to those measures, consumer spending was a weak spot and something that it is hoped will turn around in both revisions and upcoming quarters. Large consumer companies, including Nestle, Unilever and Reckitt Benckiser Group, have said they're struggling to raise prices on their products because of intense retail competition.

  • Wendy Palmer