US economic growth accelerated in the first quarter, but inflation pressures were much weaker than initially thought, supporting a recent decision by the Federal Reserve to suspend further rate increases.
There are also signs that the export- and inventory-driven momentum faded early in the second quarter. Manufacturing, retail sales, housing and exports dropped in April.
The US central bank early this year suspended its three-year monetary policy tightening campaign, dropping forecasts for any interest rate increases this year. The Fed raised borrowing costs four times in 2018.
Gross Domestic Product (GDP) increased at a 3.1 per cent annualised rate, the government said in its second reading of first-quarter GDP on Thursday. That was slightly down from the 3.2 per cent pace estimated last month. The economy grew at a 2.2per cent pace in the October-December period.
A gauge of inflation tracked by the Fed increased at a 1 per cent rate last quarter, instead of the previously reported 1.3 per cent pace. Fed policy-makers are likely to shrug off the last quarter’s growth spurt and focus on the weak domestic demand and inflation when they meet next month.
While the government trimmed its initial estimate for inventory investment, export growth was raised. These two volatile components were the key drivers of the rise in GDP in the first quarter. There was a small upward revision to consumer spending growth. Business spending on equipment actually contracted in the last quarter, while the housing market was weaker than initially thought. The first-quarter GDP growth revision was in line with economists’ expectations. Excluding trade, inventories and government spending, the economy grew at a 1.3 per cent rate as reported last month. That was the slowest since the second quarter of 2013. The economy will mark 10 years of expansion in July, the longest on record.
The current slowdown in growth largely reflects the fading stimulus from the Trump administration’s hefty tax cuts and spending increases last year. A trade war between the US and China is also seen hurting the economy. Growth estimates for the second quarter are below a 2.0 per cent pace.
The government also reported on Thursday after tax profits without inventory valuation and capital consumption adjustment, which correspond to S&P 500 profits, fell at a 0.8 per cent rate or $15.9 billion in the first quarter after falling at a 1.7per cent pace or $34.2 billion in the fourth quarter.
Gross Domestic Income (GDI), increased at a rate of 1.4 per cent in the first quarter, compared to the fourth quarter’s 0.5 per cent pace. The average of GDP and GDI, increased at a 2.2 per cent rate in the January-March period, up from a 1.3 per cent growth pace in the fourth quarter.
US financial markets were little moved by the GDP data.
Weaker details
Export growth in the first quarter was revised up to a 4.8 per cent rate, outpacing an upgrade to imports. As a result, trade added 0.96 percentage point to GDP rather than the 1.03 percentage points estimated last month.
Growth in inventories was revised down to a $125.5 billion rate in the first quarter from the previously estimated $128.4 billion pace. Part of the inventory build was because of weak demand, especially in the automotive sector, which is weighing on production at factories. Inventories contributed 0.60 percentage point to first-quarter GDP, rather than the 0.65 percentage point reported last month.
Growth in consumer spending, which accounts for more than two-thirds of US. economic activity, was revised up to a 1.3 per cent rate. Consumer spending was previously reported to have increased at a 1.2 per cent pace in the first quarter. Business spending on equipment dropped at a 1.0per cent pace instead of rising at a 0.2 per cent rate. That was the weakest since the first quarter of 2016. Government investment increased at a 2.5 per cent rate. It was previously reported to have risen at a 2.4 per cent rate.