US GDP blows past estimates despite slowdown in consumer spending

First-quarter GDP tends to be sluggish because of a seasonal quirk.

The U.S. economy slowed in the first quarter as consumer spending grew at its weakest pace in almost five years, but the setback is likely temporary against the backdrop of a tightening labor market and large fiscal stimulus. The price index for personal-consumption expenditures increased at a 2.7% pace in the first quarter, matching the fourth quarter's pace.

Growth in consumer spending, which accounts for more than two-thirds of US economic activity, braked to a 1.1 percent rate in the first quarter.

In the GDP report, after adjusting for inflation, final sales to domestic purchasers - which strip out inventories and trade - rose at a 1.6% pace, the slowest in two years, after a 4.5% advance that was the fastest since 2010. Analysts expect growth to surpass 3 percent in the current quarter. These data were mostly consistent with that optimism, as business spending was one of the larger bright spots in the first quarter GDP data.

The slight pullback in the pace of business investment from the fourth quarter could have been due to the strong incentives businesses had to invest in the fourth quarter of past year before the corporate tax rate declined from 35% to 21%.

Paul Ashworth, chief USA economist at Capital economists said that 2.3% growth in the first three months of the year is a little disappointing because historic tax cuts, which were passed last year and came into effect in January, should have provide a strong boost to growth.

A separate Labor Department report Friday showed that a broad measure of employee compensation rose more than expected in the first quarter, adding to signs that the tight job market is supporting a pickup in pay.

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Lower corporate and individual tax rates as well as increased government spending will likely lift annual economic growth close to the administration's 3 percent target.

Minutes of the March 20-21 meeting published earlier this month showed policymakers "expected that the first-quarter softness would be transitory", citing "residual seasonality in the data, and more generally to strong economic fundamentals". The U.S. economy grew at a steady 2 percent rate over the past decade. The decline in spending on vehicles and parts subtracted 0.42 percentage point from growth. The winter months have been the weakest quarter of the year for several years. The Federal Reserve expects economic output to expand by 2.7% for the year as a whole.

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"The first quarter has been persistently weak in recent years", David Sloan, senior economist at Continuum Economics, said before the report. Residential investment increased at a 12.8 percent rate in the October-December period.

At the same time, Boeing said it's seeing solid global demand, while United Parcel Service said the US economy is showing "healthy fundamentals".

Nonresidential fixed investment, or spending on equipment, structures and intellectual property, increased at a still-solid 6.1% annualized pace, contributing 0.76 percentage point to growth.

  • Rita Burton