US economic growth stronger than expected

Apr 28, 2018, 10:58
US economic growth stronger than expected

A separate report Friday found that US private sector workers saw their wages go up 1 percent in the first quarter, the biggest quarterly gain in 11 years, a sign that the tight job market is beginning to lift wages. The initial reading indicates the US economy expanded at a 2.3% annual pace in the first quarter of 2018. The first quarter typically sees slower growth due to weather and post-holiday cutbacks, so the falloff was no surprise, and supporters of the tax cuts have room to argue that the better-than-expected results were driven at least in part by the tax cuts.

The Commerce Department said real gross domestic product climbed by 2.3% in the first quarter compared to the 2.9% jump in the fourth quarter. In addition, this was the strongest first quarter reading in three years. That was the slowest pace since the second quarter of 2013 and followed the fourth quarter's robust 4.0 percent growth rate. The labor market is near full employment and both business and consumer confidence are strong.

Another factor may have led to subdued growth figures: First-quarter growth has tended to be weaker than other quarters in recent years, potentially from seasonal quirks in the data that dissipate in subsequent months. Service-related consumer spending expanded somewhat at 2.1%, but if those numbers hold up in the revisions, someone will have to figure out what has consumers spooked - especially after the big tax cuts put more money in their pockets.

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"Growth rates around 3 percent are not sustainable but for the next couple of years all the government stimulus is going to provide a lot of economic juice", said Mark Zandi, chief economist at Moody's Analytics.

Paul Ashworth, chief USA economist at Capital Economics, said the latest GDP figures were "something of a disappointment since the tax cuts should have provided an immediate boost".

It's not a bad report, and this quarter has chronic issues with metrics.

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Still, the January-March increase came in better than expected and was enough to propel growth over the past year to come close to the 3 percent goal set by the Trump administration. Core prices - which exclude food and energy - rose at a 2.5% rate. The economy may expand 2.8 percent in 2018, according to the median of forecasts compiled by Bloomberg, before slowing in the following two years. Remember, the US central bank raised interest rates last month in affirmation of the strong economy and labor market and they forecast at least two additional rate hikes this year.

Business spending on equipment slowed to a 4.7 percent rate in the January-March quarter after double-digit growth in the second half of 2017.

Investment in homebuilding was unchanged in the first three months of the year as sluggish home sales caused by a dearth of houses on the market weighed on brokers' commissions. Investment in new structures almost doubled to 12.3 percent. Spending on durable goods like cars surged in the final months of 2017, possibly replacing those lost in the storms, and then receded in the first quarter.

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

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