U.S. economy bogs down in first quarter with slowest growth in 3 years, GDP shows

Jeffry Bartash
Marketwatch

The government’s official scorecard for the U.S. economy in the first quarter pointed to the weakest growth in three years, but the slowdown appeared tied to temporary effects that are likely to give way a rebound in the coming months.

Gross domestic product increased at a meager 0.7% annual pace in the first three months of the year, down from 2.1% and 3.5% in the back half of 2016. Economists polled by MarketWatch had forecast a 0.9% increase.

In recent trading, the Dow Jones Industrial Average DJIA, -0.19% and the S&P 500 index SPX, -0.19% fell slightly.

The steep drop-off stemmed from the smallest increase in consumer spending since the end of 2009, largely reflecting fewer sales at car dealers. Consumer outlays rose just 0.3%, a steep drop from the 3.5% gain at the end of 2016.

Government also reduced spending and businesses scaled back on inventory production to make sure they didn’t get stuck with lots of unsold goods on warehouse shelves.

The pullback in consumer spending is unlikely to last, though.

Americans spent less on gasoline and home-heating fuel after a spell of unseasonably warm weather in February—the second hottest on record. Warm weather also dampened sales at retailers such as clothing stores trying to move the last of their cool-weather inventory while a bout of stormy weather kept consumers away in March.

That’s unlikely to be repeated in the spring.

For starters, household finances are in the best shape in years amid record stock market gains, a strong labor market and gradually rising wages. An index that tracks labor costs, for example, posted the biggest gain in the first quarter in a decade. Read: Worker compensation posts biggest gain since 2007

Millions of Americans also received their tax refunds later than usual in 2017, a hiccup that probably shifted some spending from the first quarter to early in the second quarter.

Consumer spending “will rebound in the second quarter,” said Paul Ashworth of Capital Economics.

The better financial positions of households is evident in steadily rising home sales. In the first quarter, investment in home building climbed 13.7%, marking the construction industry as a major engine of U.S. growth. The biggest problem in the real-estate market is a lack of properties for sale.

Another sudden tailwind for the economy — after a prolonged absence — is business spending.

Companies are investing more in structures such as drilling rigs and office buildings. So-called fixed business investment increased 10.4% and accounted for bulk of U.S. growth in the first quarter, a marked contrast to the prior two years when it was often an albatross.

The gain was driven by a whopping 450% increase in outlays by energy producers bent on pumping more oil and natural gas out of wells on land and at sea.

Yet even though American corporations are brimming with optimism about a pro-business Trump White House, they’ve shed none of the caution exhibited during a stutter-step eight-year-old economic recovery.

Companies barely increased the production of goods, making inventories the other big drain on first-quarter growth. They rose by just $10.3 billion in the first quarter after a roughly $50 billion increase at the end of 2016.

Government spending at the local, state and federal levels also fell 1.7%, the largest drop in four years.

Trade, another key part of the economy, was largely a wash on first-quarter results. Exports climbed 5.8% while imports rose 4.1%.

Meanwhile, Inflation advanced at a 2.4% annual pace in the first quarter, according to the personal-consumption expenditures, or PCE index. The PCE index—the preferred inflation gauge of the Federal Reserve—easily topped the central’s bank’s 2% target for the first time in several years.

Yet the core PCE that strips out the volatile food and energy categories was little changed at 2%, underscoring the big effect that oil prices can have on U.S. inflation.

U.S. oil prices CLM7, +0.37%  have retreat after a run-up late last year, suggesting moderation in price pressures. If labor costs continue to rise, however, that could become another source of worry for the Fed.

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