US economic growth weakened to 0.7% in first quarter

Owen Stevens
April 28, 2017

Output in the construction sector was also dragging on GDP after expanding by 0.2% in the first three months of the year following 1% growth in the fourth quarter of 2016.

GDP grew 0.7% in the last three months of 2016, following its 0.5% growth in the quarter before, but the ONS attributed the unexpectedly harsh slowdown to services growth dropping from 0.8% to 0.3% quarter-to-quarter.

Economists had been expecting GDP growth to slow as consumers tightened their belts in the face of rising inflation, but they had pencilled in a higher growth figure of 0.4%.

The first of three "official" first quarter GDP estimates will be released by the U.S. Bureau of Economic Analysis (BEA) at 8:30 a.m. EDT tomorrow.

In the recent years, the economy has typically slowed down dramatically in the first quarter of the year, due to seasonal factors such as bad weather hurting consumer spending.

That was wide of the 1.2% pace of expansion economists had pencilled in and less than the expansion of 2.1% seen over the previous quarter.

The annual rate of inflation now stands at a three-year high of 2.3% - with wage rises standing at 2.2% - the disparity highlighting the growing erosion of household spending power.

Separate Office for National Statistics figures published earlier this month showed household savings rates have hit a record low, as consumers plundered their nest eggs to keep spending. The Employment Cost Index, a measure of wages and benefits given to American labor, hit 0.8% in the first quarter, its highest reading for since Q1 2008.

As Neil Dutta, head of USA economic research at Renaissance Macro noted, the underlying fundamentals for consumption looked stronger than the GDP gain, so the weakness may be temporary. Business spending in the residential segment added another 0.5pc to the economic growth.

The bank previously forecast inflation to peak at 2.8 per cent in the first half of next year and for GDP to grow by 1.6 per cent in 2018. Manufacturing was the strongest overall component with a 0.5% increase for the quarter. The slowdown in inventory rebuilding cut almost a percentage point from growth in the first quarter. State and local outlays fell at a 1.6% annualized rate, while spending by federal agencies dropped at a 1.9% pace.

Part of the problem for the administration is that its efforts to boost the economy are coming after the economic expansion has been underway for almost eight years. Trump said he could double growth to 4 percent, though since then, Treasury Secretary Steven Mnuchin has said the goal is to achieve GDP growth of 3 percent or better with a combination of lower taxes, deregulation and better enforcement of trade agreements. In that era, the highest level of annual growth in real GDP was 2.6 percent in 2015.

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