The U.S. Economy Was Weaker Last Quarter Than We Thought
Economic growth was slower at the beginning of this year than the government previously reported, as consumers pulled back spending and the housing market weighed down output.
Gross domestic product, a broad measure of the goods and services produced across the U.S., expanded at a seasonally and inflation-adjusted annual rate of 2% in the first quarter, the Commerce Department reported Thursday. That was weaker than an earlier estimate of 2.2% growth.
Consumers spent less on services than previously thought. Health-care purchases by nonprofits and spending on finance and insurance services were all weaker than the government previously reported. The economy also saw less private inventory investment, chiefly in retail inventories.
Still, investment outside of the housing market, such as computer software and research and development, was stronger than earlier thought, growing by the fastest pace in about three years.
“Although GDP growth in the first quarter was revised lower, and was softer than in the last three quarters of 2017 when growth averaged 2.7%, the economy is in much better shape than the headline number would indicate,” said PNC chief economist Gus Faucher.
One potential issue: First-quarter growth has been weaker compared with other quarters in recent years because of issues with the way the government seasonally adjusts economic data. In the longer term, the economy grew 2.8% in the first quarter from a year earlier.
Analysis suggests growth has picked up in the second quarter. Forecasting firm Macroeconomic Advisers on Wednesday projected GDP growth would hit a 5.3% annual rate in the second quarter while the Federal Reserve Bank of Atlanta’s GDPNow model projected output would grow 4.5%. The Commerce Department will release second-quarter growth data at the end of July, along with comprehensive revisions of historical data.
Economists think growth will remain robust throughout 2018, buoyed by an ultralow unemployment rate and steady job and wage growth. At the same time, the late-2017 tax overhaul could encourage spending by businesses and consumers.
A gauge of company earnings, profits after tax without inventory valuation and capital consumption adjustments, rose a seasonally adjusted 10.6% in the first quarter, above the previous reading that showed a 7.8% increase. This could signal the newly lowered federal corporate tax rate, which was cut to 21% from 35%, and other tax-law changes may have affected businesses’ bottom lines substantially.
The first quarter saw residential investment weigh on growth. Home building and renovations declined at a revised annual rate of 1.1%. This could reverse in the second quarter. U.S. housing starts rebounded last month to the highest level since 2007.
Meanwhile, consumer spending, which accounts for more than two-thirds of total U.S. economic output, increased at a 0.9% annual pace last quarter. This signals pullback from more robust spending notched during the second half of 2017, which saw a strong holiday buying season and a swell of hurricane-related purchases, like replacement cars. A particularly harsh winter has also been blamed for part of the weaker purchasing in the first quarter.
“The slowdown in consumer spending in particular may raise an eyebrow, but the softer result should be viewed with a healthy dose of skepticism, ” said Jim Baird, chief investment officer at Plante Moran Financial Advisors. “Growth in the second quarter is largely believed to have regathered momentum.”
Personal-consumption expenditures, a measure of household spending, increased a seasonally adjusted 0.6% in April from the prior month, according to the Commerce Department. That was the largest increase in five months, signaling a rebound in spending.
Francesca’s Holdings Corp., which sells women’s apparel, accessories and home goods, saw net sales for the first quarter decline, largely because of lower foot traffic in stores and fewer customers actually making purchases when they did walk through the door. Still, the company saw the decline moderate heading into the spring.
“I know there’s been various reports out there, weather impact on business in [the first quarter],” Steven Lawrence, Francesca’s chief executive, said on a recent earnings call. “But clearly, you could see it in the seasonal categories. We did definitely see the apparel trends pick up as we got deeper into that April time period and the weather warmed up.”
The report also showed government spending grew at a 1.3% annual pace last quarter, with federal and state spending slowing from stronger spending seen at the end of last year.
Net exports docked 0.04 percentage point from the overall GDP growth rate in the first quarter. Change in private inventories subtracted 0.01 percentage point. Both categories tend to be volatile from quarter to quarter.
Source: Dow Jones