On Friday the Commerce Department released its quarterly report on Gross Domestic Product (GDP), the value of all goods and services produced in the nation. The initial reading indicates the U.S. economy expanded at a 2.3% annual pace in the first quarter of 2018. This growth is somewhat slower than in the prior three quarters, however, a better performance than was expected. Earlier this week, economists had forecasted a 2% increase in GDP.
In the first three months of 2018, consumer spending, the main engine of growth, rose just 1.1%, its weakest pace in nearly five years, following a 4% gain in the fourth quarter of 2017, which was the biggest in three years. Most experts view the setback as temporary against the milieu of a tightening labor market along with strong consumer confidence and business growth.
SEASONALITY LEADS TO STATISTICAL QUIRKS
Due to what is known as a “seasonal quirk,” it is not unusual for first-quarter growth to be sluggish and possibly not an accurate reflection of the economy. Economists suspect the statistical quirks are driven by residual seasonality and have caused disappointing first-quarter GDP in five of the past eight years. Furthermore, in each of those five years, the first quarter turned out to be the worst quarter of growth for the year. The Commerce Department’s Bureau of Economic Analysis is currently addressing the issue by reviewing its methodology.
OUTLOOK ON GROWTH REMAINS OPTIMISTIC
Despite a weak start to the year, economists expect growth will accelerate in the second quarter as households start to feel the impact in their paychecks from the $1.5 trillion income tax package which came into effect in January. Also, lower corporate tax rates and increased government spending will likely lift annual economic growth to President Trump’s target of 3%.
Officials from the Federal Reserve are expected to overlook the luke-warm growth of the first-quarter. Remember, the U.S. central bank raised interest rates last month in affirmation of the strong economy and labor market and they forecast at least two additional rate hikes this year.
BUSINESS GROWTH PICKED UP THE SLACK
Although U.S. economic growth cooled last quarter as consumers pulled back spending from the prior period, business investment helped picked up some of the slack. Key business indicators show investment in structures doubled to 12.3% and spending on equipment was up 6.1%, while residential investment was flat. The value of inventories increased to $33.1 billion from $15.6 billion resulting in an increase to GDP. The trade deficit decreased due to the 4.8% increase of exports outpacing the slower increase of imports of 2.6%, thus adding to GDP. Housing investment was unchanged from the prior quarter following a 12.8% gain.
CHALLENGES TO SUSTAIN GROWTH GOAL
The Trump administration’s goal of 3% sustained growth, has challenges in an environment of dissipating inflation and borrowing costs not to mention the possible headwinds from recent tariffs on trade. Inflation, as measured by the PCE price index rose at a 2.7% annual rate in the first quarter. The year over year rate of Inflation edged up to 1.8% from 1.7%.
While not great, the report for first quarter GDP in 2018 is far from disappointing. The movement to 2.3% growth is close to expectations and follows current trends at a steady and comfortable pace.