Economy likely slowed last quarter, but rebound likely

Owen Stevens
May 6, 2017

Data from the Office for National Statistics (ONS) shows economic expansion in the first three months of the year came in at 0.3 per cent, down from 0.7 per cent in the final months of 2016. It rose 0.4 percent, slowing down from a 2.4 percent growth in the fourth quarter of 2016.

This "advance" estimate showed the US economy with its slowest growth since the first quarter of 2014.

The main reason for the decline seems to be a drop in consumer spending.

Net exports contributed 0.07 percentage point to the growth in the quarter, compared to a subtraction of 1.82 percentage points in the previous quarter. "I think the consumer is going to be in pretty decent shape" in the second quarter.

However, Paul Ashworth, Chief US Economist at Capital Economics, said the weak GDP growth won't necessarily stop the Federal Reserve from hiking interest rates again in June.

The administration touted the plan as a central pillar of Trump's promise to boost economic growth to 3%, while observers noted it would balloon the deficit by trillions of dollars and is is highly unlikely to make it into law in its current form. USA stock futures trimmed gains.

Growth in consumer spending, which accounts for more than two-thirds of United States economic activity, braked to a 0.3 per cent rate in the first quarter.

Spending fell to only 0.3 percent after a solid 3.5 percent increase in the October-December period, the lowest level in more than seven years.

The weakness in consumer spending is blamed on a mild winter, which undermined demand for heating and utilities production. Higher inflation, with the personal consumption expenditures price index averaging 2.4 percent - the highest since the second quarter of 2011 - was also a drag. Additionally, the spending of consumer also took a hit from government took time in issuing income tax refunds to combat fraud. The report showed GDP had increased just 0.7 percent during the time frame, which was both below expectations and the "weakest growth in three years".

"In some years it's been because of bad weather that kept people in their homes, keeping them from purchasing things but it's also believed to be somewhat flawed statistically - meaning that what's actually happening in the economy isn't being perfectly captured by government statistics", Hamrick tells VOA.

The Fed is not expected to raise interest rates next week. "This is a pretty regular process: When businesses accumulate too much, the produce less the next quarter", says Barry Bosworth, a Brookings economist. Inventory dynamics slashed 0.93pc off the first-quarter GDP, after having added 1.01pc in 4Q16. There may be a further drop in the next few quarters due to a glut of used cars.

Residential investment also rose strongly in the March quarter, rising above 13.7 percent after a 9.6 percent rise in the fourth quarter. Even though the first quarter was not that great, the expansion was mostly driven by private sector investment, which is a healthy development.

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