US growth slows but better than expected

Overshoot on growth could add to pressure on Fed to tighten policy more quickly

Growth in the world’s largest economy slowed sharply in the first three months of the year amid a decline in exports, consumer spending and home buying, the Commerce Department announced yesterday.

But the result was better than feared as economists were expecting the first quarter to be even weaker, following the trend of recent years, despite the boost from sweeping tax cuts in December.

GDP expanded by 2.3 per cent in the January-March period, according to a preliminary estimate, down from 2.9 per cent in the final months of 2017, according to the report. But growth was two tenths of a point better than a consensus forecast among economists.

The outcome — which is subject to significant revision in the coming months — suggested the current economic expansion was uninterrupted, which could offer the White House a measure of relief that the more dire predictions of weaker growth had not been borne out.

Economists say statistical anomalies may account for some of the weakness, meaning growth in the first quarter may have been stronger than it appeared.

President Donald Trump has vowed to return the United States to three per cent annual growth or higher, and is banking on a juiced economy to produce higher government revenues and offset the $1.6 trillion (Dh5.8 trillion) cost of the tax cuts.

Economists say however the current pace of growth is likely above potential, making sustained growth of three per cent unrealistic.

The Federal Reserve is not expected to raise interest rates at a periodic meeting on monetary policy this week but the overshoot on growth — and signs of rising prices and wages also published yesterday — could add to pressure on the central bank to quickly.

Consumer spending had its slowest quarter in more than four years, rising 1.1 per cent, after a jump of four per cent in the prior quarter when natural disasters in the southern and western United States drove a boom in purchases of retail goods and supplies. tighten

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Consumers bought fewer cars and less clothing and footwear in the winter months while also spending less on food and drink, according to the report. And real estate brokers saw a dip in commissions in the tight housing market.

Spending by state and local governments slowed, rising just 0.8 per cent after a 2.9 per cent jump in the prior quarter, and exports also fell. This was partly offset by higher spending on business inventories, which companies ran down as they raced to meet consumer demand following the back-toback hurricanes of late summer.

Meanwhile a closely-watched measure of inflation, the “core” Personal Consumption Expenditures price index, which strips out volatile food and fuel prices, had its strongest quarter in more than 10 years, rising 2.5 per cent.

That was six tenths faster than the fourth quarter, this put the result above the Federal Reserve’s two per cent target for the first time in two years.

Meanwhile, the Labour Department’s Employment Cost Index showed that wages and benefits for civilian workers rose 0.8 per cent in the first three months of the year, marginally faster than expected.

Market watchers and economists say it is increasingly likely the Fed will have to raise interest rates a total of four times this year to prevent the long-awaited return of inflation.