US Growth Cools to 2.3% While Compensation Costs Accelerate

News Release: Gross Domestic Product - Bureau of Economic Analysis

Wall Street Journal Global Economics Editor Jon Hilsenrath on first-quarter GDP.

The year is off to a sluggish start for the US economy - and a decline in spending on clothing and footwear is partly to blame.

While GDP growth was the best for any January-March period since 2015, it's a step down from three quarters of GDP growth above or near 3%, and a reminder that the first quarter remains plagued by data quirks.

GDP, the value of all goods and services produced within the USA, increased at an annualized rate of 2.3%, down from 2.9% in the fourth quarter.

On the worldwide front, net exports swung back to be a positive contributor in the first quarter, adding 0.20 percentage points, after subtracting 1.16 percentage points from GDP in the fourth quarter. In addition, this was the strongest first quarter reading in three years. The GDP price index rose 2 percent in the first quarter.

Strong business investment helped offset consumer pullback.

While the Donald Trump-led administration has vowed to accelerate annual U.S. economic growth to over 3 per cent, the Federal Reserve last month expected United States economy to expand at 2.7 per cent for the whole year 2018.

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.

J.P. Morgan economist Michael Feroli said that "much of the upside surprise in the headline number was accounted for by stronger-than-expected federal government spending", which he expects will be revised lower.

But Trump and Republicans strongly criticized former President Obama for not having a single calendar year in which economic growth hit 3 percent. Joseph Lavorgna, chief economist at the investment bank Natixis, points out that GDP revisions are typically quite large, more than a full percentage point on average since 2000.

Inflation also increased by a 2.7 percent annual rate, bringing the year-over-year rate to 1.8 percent, from 1.7 percent. In my testimony before the Joint Economic Committee earlier this month, I said that tax reform should lead to $55 billion in additional fixed investment in manufacturing this year, with the sector adding at least 100,000 more workers. At that rate, sustained over many years, the tax "plan will pay for itself with growth", Treasury Secretary Steven Mnuchin said last week, not for the first time.

Wages and salaries were up 2.7 percent in the 12 months through March compared to 2.5 percent in the year to December.

"It is increasingly hard to argue that the 2 percent inflation target hasn't already been breached", said Steven Blitz, chief USA economist at TS Lombard in NY. This was driven in part by a slowdown in discretionary categories like shoes, apparel and cars, as well as food and beverages.

"The first quarter has been persistently weak in recent years", David Sloan, senior economist at Continuum Economics, said before the report.

With consumer spending slowing, inventories increased at a $33.1 billion rate in the first quarter, up from a $15.6 billion pace in the prior period. Inventory investment contributed 0.43 percentage point to GDP growth after subtracting 0.53 percentage point in the fourth quarter.

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