U.S. expands at weakest pace in three years

Q1 GDP NUMBERS

MARTIN CRUTSINGER WASHINGTON • The U.S. economy turned in the weakest performance in three years in the January-March quarter as consumers sharply slowed their spending. The result fell far short of President Donald Trump’s ambitious growth targets and underscores the challenges of accelerating economic expansion.

The gross domestic product, the total output of goods and services, grew by just 0.7 per cent in the first quarter following a gain of 2.1 per cent in the fourth quarter, the Commerce Department reported Friday.

The slowdown primarily reflected slower consumer spending, which grew at a seasonally adjusted annual rate of 0.3 per cent after a growth rate of 3.5 per cent in the fourth quarter. It was the poorest quarterly showing in more than seven years.

Despite the anemic firstquarter performance, the U.S. economy’s prospects for the rest of the year appear solid. Growth is expected to be fuelled by a revival in consumer spending, supported by continued strong job growth, accelerating wage gains and record stock levels.

Weakness in the first quarter followed by a stronger expansion in the spring has become a pattern in recent years.

The government’s difficulty with seasonal adjustments for the first quarter has been a chronic problem and may have shaved as much as one percentage point off growth this year.

The sharp slowdown in consumer spending in the first quarter was attributed to a collection of temporary factors: warmer weather, which shrank spending on heating bills, a drop-off in auto sales after a strong fourth quarter and a delay in sending out tax refund cheques, which also dampened spending.

Sal Guatieri, senior economist at BMO Capital Markets, said he expected consumer and government spending to bounce back, leading to a much stronger second quarter.

“Still, the report will mark a rough start to the administration’s high hopes of achieving three-per-cent or better growth, not the kind of news it was looking for to cap its first 100 days in office,” Guatieri said in a note to clients.

Averaging the two quarters, they forecast growth of around 2 per cent for the first half of this year. That would be in line with the mediocre performance of the eight-year economic expansion, when growth has averaged just 2.1 per cent, the poorest showing for any recovery in the post-Second World War period.

Trump had repeatedly attacked the weak GDP rates during the campaign as an example of the Obama administration’s failed economic policies.

He said his program of tax cuts for individuals and businesses, deregulation and tougher enforcement of trade agreements would double growth to four per cent or better.

In unveiling an outline of the administration’s tax proposals on Wednesday, Treasury Secretary Steven Mnuchin said he believed growth above three per cent would be achievable.

Many economists are more skeptical. They are forecasting growth of this year around 2.2 per cent. That would be an improvement from last year’s 1.6 per cent, the weakest showing in five years, but far below Trump’s goal. Many analysts believe that the impacts of Trump’s economic program will not be felt until 2018 because they are not expecting Congress to approve some version of Trump’s tax program until late this year.

The GDP report released Friday was the first of three estimates the government will make of first-quarter growth.

The 0.7-per-cent increase was the worst showing since GDP contracted by 1.2 per cent in the first quarter of 2014.

In addition to weaker consumer activity, the firstquarter slowdown also reflected a cutback in restocking of store shelves. The slowdown in inventory rebuilding cut nearly a percentage point from growth in the first quarter. Also acting as a drag was a reduction in government spending, which fell at a 1.7-percent annual rate with both the federal government and state and local governments seeing cuts.

On the positive side, business investment rose at a 9.4-per-cent rate, helped by a record surge in spending in the category that tracks spending in the energy sector. This category had seen sharp cutbacks in recent quarters, reflecting reductions in exploration and drilling as energy prices declined.

Housing construction was also strong, growing at a 13.7-per-cent rate, the fastest pace in nearly two years.

Trump noted the weak 2016 GDP performance in a tweet Wednesday and contended that “trade deficits hurt the economy very badly.” For the first quarter, trade was actually a small positive after a major drag in the fourth quarter.

Part of the problem for the administration is that its efforts to boost the economy are coming after the economic expansion has been under way for nearly eight years. At this point in a recovery, stimulus measures tend to have less impact. The Federal Reserve, in fact, has begun raising interest rates to ensure that the tight job market doesn’t trigger high inflation pressures.

For now, analysts say they think Trump’s stimulus efforts and the Fed’s gradual tightening can co-exist.

Yet they also caution that the Fed may eventually raise rates to a point where they will begin to constrain growth, making it harder for Trump to achieve his GDP goals. Shoppers at the Oculus mall in New York. The slowdown in U.S. GDP growth reflected weak consumer spending, which grew at a seasonally adjusted annual rate of 0.3 per cent, its poorest quarterly showing in over seven years.