US economy runs into slow patch as it grows at its weakest pace in three years

Wage growth in the first quarter though is the fastest in 10 years as labour market nears full employment

PUBLISHED : Saturday, 29 April, 2017, 1:39am
UPDATED : Saturday, 29 April, 2017, 1:39am

The US economy grew at its weakest pace in three years in the first quarter as consumer spending almost stalled, but a surge in business investment and wage growth suggested activity would regain momentum as the year progresses.

The soft patch at the start of the year is bad news for the Trump administration’s ambitions to significantly boost growth.

“It marks a rough start to the administration’s high hopes of achieving 3 per cent or better growth; this is not the kind of news it was looking for to cap its first 100 days in office,” said Sal Guatieri, a senior economist at BMO Capital Markets in Toronto.

Gross domestic product increased at a 0.7 per cent annual rate also as the government further cut defence spending and businesses spent less on inventories, the Commerce Department said on Friday in its advance estimate. That was the weakest performance since the first quarter of 2014.

The pedestrian first-quarter growth pace is, however, not a true picture of the economy’s health. Wage growth in the first quarter was the fastest in 10 years as the labour market nears full employment and business investment on equipment was the strongest since the third quarter of 2015.

Also underscoring the economy’s underlying strength, consumer and business confidence are near multi-year highs. First-quarter GDP also tends to underperform because of difficulties with the calculation of data that the government has acknowledged and is working to rectify.

Prices for US Treasuries fell. The dollar was little changed as were US stocks.

President Donald Trump has pledged to boost annual growth to 4 per cent through infrastructure spending, tax cuts and deregulation. Given weak productivity and labour shortages in some areas, economists see GDP growth just above 2 per cent this year.

On Wednesday, the Trump administration proposed a tax plan that includes cutting the corporate income tax rate to 15 per cent from 35 per cent, but offered no details.

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“The cupboard is bare when companies need to hire skilled labor. You can’t build American if you can’t find any American workers to put on your shop floor,” said Christopher Rupkey, chief economist at MUFG Union Bank in New York.

Growth in consumer spending, which accounts for more than two-thirds of US economic activity, braked to a 0.3 per cent rate in the first quarter. That was the slowest pace since the fourth quarter of 2009 and followed the fourth quarter’s robust 3.5 per cent growth rate.

The near stall in consumer spending is blamed on a mild winter, which undermined demand for heating and utilities production. Higher inflation, with the reading on the personal consumption expenditures index averaging 2.4 per cent - the highest since the second quarter of 2011 - also weighed on consumer spending.

Government delays issuing income tax refunds to combat fraud also hit spending.

In a separate report on Friday, the Labour Department said wages jumped 0.9 per cent in the first quarter, the largest increase in a 10 years, after rising 0.5 per cent in the fourth quarter. Accelerating wage growth and higher savings are expected to boost consumer spending.

With wage growth, business investment and inflation firming, economists believe Federal Reserve officials will look past the weak first-quarter GDP when they meet next week.

Fed Chair Janet Yellen has previously described quarterly GDP as “noisy.” The US central bank lifted its overnight interest rate by a quarter of a percentage point in March and has forecast two more hikes this year. It is not expected to raise interest rates next Wednesday.

“There is enough reason to doubt the growth slowdown for the Fed to stay the course on tightening, especially with a bigger-than-expected pop in employment costs,” said Chris Low, chief economist at FTN Financial in New York.

Businesses accumulated inventories at a rate of US$10.3 billion in the last quarter, down from US$49.6 billion in the October-December period. Inventories subtracted 0.93 percentage point from GDP growth. Government spending on defence declined at a 4.0 per cent pace, the biggest fall since the fourth quarter of 2014. It was the second quarterly drop.

Business spending on equipment accelerated at a 9.1 per cent rate in the first quarter thanks to rising oil prices. Spending on mining exploration, wells and shafts surged at a record 449 per cent rate. That led to spending on non-residential structures rebounding at a 22.1 per cent pace, the fastest in three years. Investment in home building increased for a second quarter while rising exports narrowed the trade deficit.

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