U.S. economy hurt by decline in spending

GDP gains 0.7% as consumer spending slows

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 underscores the challenge facing President Donald Trump in achieving his ambitious economic growth targets.

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

The slowdown primarily reflected slower consumer spending, which grew by just 0.3% after a 3.5% gain in the fourth quarter. It was the poorest showing in more than seven years.

Economists attributed the sharp slowdown in consumer spending to shrinking utility bills due to warmer weather, a drop-off in auto sales and a delay in sending out tax refund checks by the IRS, 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 3% 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.

Growth of around 2%, as forecast by a number of economists, would be in line with the mediocre performance of the eight-year economic expansion, when growth has averaged just 2.1%, the poorest showing for any recovery in the post-World War II period.

Trump 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 4% or better.

In unveiling an outline of the administration’s tax proposals on Wednesday, Treasury Secretary Steven Mnuchin said he believed growth above 3% would be achievable.

Private economists are more skeptical. They are forecasting growth of this year around 2.2%. That would be an improvement from last year’s 1.6%, 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% increase was the worst showing since GDP contracted by 1.2% in the first quarter of 2014.

In addition to warmer

weather holding back spending on utility bills, the 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% 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% rate, helped by a record surge 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.

In recent years, the first quarter has often turned out to be the weakest for the year, reflecting in part problems the government has not

been able to resolve in adjusting its figures for normal seasonal changes.

The Bureau of Economic Analysis, which prepares the GDP report, has a three-year program aimed at addressing this problem. Analysts say lingering issues in this area may artificially hold down Friday’s initial GDP estimate for the first quarter.

Many economists believe growth in the current April-June quarter will rebound to a rate of 3% or better as consumer spending, which accounts for two-thirds of economic activity, regains momentum.

“There are a lot of tailwinds behind consumers going into the spring, including low unemployment, better wage growth, high consumer confidence and record stock prices,” said Mark Zandi, chief economist at Moody’s Analytics.