Home World Business US economy expanded at 0.7pc annual rate in first quarter

US economy expanded at 0.7pc annual rate in first quarter

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The Commerce Department provided on Friday its first statistical snapshot of the US economy in the first quarter, the gross domestic product estimate.

The Numbers

Most experts say they believe the economy is picking up speed now, with Wall Street looking for growth at an annual rate ... Most experts say they believe the economy is picking up speed now, with Wall Street looking for growth at an annual rate of 2.8 per cent in the second quarter. Photo: Daniel Acker

The economy barely grew, expanding at an annual rate of only 0.7 per cent.

The growth was a sharp decline from the 2.1 per cent annual rate recorded in the final quarter of last year. It was the weakest quarterly showing in three years.

Consumption, the component reflecting individual spending, rose by only 0.3 per cent, well below the 3.5 per cent rate in the previous quarter.

The Takeaway

The first-quarter performance upset expectations for a Trump bump at the start of 2017.

Modest as the headline number looked, it did not come as a surprise to Wall Street — before the report, Wall Street had been looking for growth to come in at 0.9 per cent. What is more, many experts said the data was skewed by seasonal factors, like unusually warm temperatures in many parts of the country in January and February.

The economy’s weakness reflected new caution among consumers. Other sectors like housing and business investment turned in a stronger showing, but not enough to offset factors like weaker retail sales.

The Gut Reaction

Don’t panic. The first-quarter numbers were nothing special — but they’re not a sign that the economy is headed for a fall, either. The drop in consumer spending followed a big increase in late 2016, so some reversal was probably inevitable. In addition, business spending showed real signs of life, and that trend should help growth stay in the 2 per cent range even if consumers remain hesitant to spend.

Michelle Meyer, chief US economist at Bank of America Merrill Lynch, said healthier business investment indicated that the overall economy was performing better than the headline numbers would suggest.

What is more, even if brighter consumer sentiment isn’t translating into faster growth, it should serve as a bulwark against recession for the time being. “It’s hard to be worried about the underlying outlook for consumption with consumer confidence running at 17-year highs,” said Ted Wieseman, an economist with Morgan Stanley.

Most experts say they believe the economy is picking up speed now, with Wall Street looking for growth at an annual rate of 2.8 per cent in the second quarter. But initial hopes have been repeatedly proven too rosy lately — just two months ago, economists predicted that first-quarter growth would be roughly 2 per cent.

The Background

Friday’s estimate, which will be revised twice in the coming months as more information comes in, highlights a growing debate over what data best captures economic activity.

Indicators referred to as “soft data” — surveys of corporate investment plans as well as consumer and business sentiment — have all risen since President Donald Trump’s victory in November. And just this week, the president’s blueprint for big tax cuts for business and individuals helped fuel a renewed rally on Wall Street.

But actual economic activity — retail sales, inventory accumulation, automobile purchases — has not caught up with rising expectations, at least not yet.

Indeed, if the weakness persists, it could provide ammunition to the White House and Republicans on Capitol Hill who favour big tax cuts, since that could stimulate growth in the short term, at the risk of much higher deficits.

“Reconciling improved consumer confidence with modest levels of consumption is an exercise that will occupy us for the rest of the year,” said Carl R. Tannenbaum, chief economist at Northern Trust in Chicago, in an interview before the GDP estimate’s release.

“I know there will be a school of thought that blames it on residual seasonality,” he said, referring to the winter doldrums that also reduced growth in the first three months of 2016, 2014, 2011 and 2010. “But I have to be honest: The hard data just wasn’t very good last quarter.”

“The retail retreat, especially in autos, was greater than many people anticipated,” he said.

Why would the first quarter appear weaker than expected year after year, when the government adjusts for seasonal factors like a rise in retail sales before Christmas, or a slowdown in construction in January and February?

One partial explanation is that warm winters have reduced energy spending and generation at utilities. Another is that government statisticians were having trouble compensating for sets of data that are more volatile than others, like government spending and imports and exports.

“These indicators tend to be lumpy, but they are never lumpy in the same way, so it’s tough to predict,” Tannenbaum said.

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