Economy accelerates in first quarter, but momentum fading

Washington

US economic growth accelerated in the first quarter, the government confirmed on Thursday, but the export and inventory boost to activity masked weakness in domestic demand, some of which appears to have prevailed in the current quarter.

Gross domestic product (GDP) increased at a 3.1 per cent annualised rate, also driven by spending on highways and defence, the government said in its third reading of first-quarter GDP. That was unchanged from its estimate last month. The economy grew at a 2.2 per cent pace in the October-December period.

Despite the unchanged reading, growth in consumer spending was revised lower and business investment in intellectual property products was stronger than previously estimated.

There were also upward revisions to spending on non-residential structures. Revisions to the trade deficit and inventory accumulation were minor.

Economists polled by Reuters had expected that first-quarter GDP growth would be unrevised at a 3.1 per cent rate.

Excluding trade, inventories and government spending, the economy grew at only a 1.3 per cent rate in the first quarter. That was the slowest rise in this measure of domestic demand since the second quarter of 2013.

When measured from the income side, the economy grew at a tepid one per cent rate in the last quarter. Gross domestic income (GDI) was previously reported to have increased at a rate of 1.4 per cent in the first quarter. The average of GDP and GDI, also referred to as gross domestic output and considered a better measure of economic activity, increased at a 2.1 per cent rate in the January-March period, down from the 2.2 per cent growth pace estimated last month.

Federal Reserve chairman Jerome Powell last week acknowledged the temporary boost to economic growth from trade and inventories, which he described as "components that are not generally reliable indicators of ongoing momentum".

The US central bank last week signalled interest rate cuts as early as July, citing rising risks to the economy, especially from an escalation in the trade conflict between the United States and China, and low inflation.

A gauge of inflation tracked by the Fed increased at a 1.2 per cent rate in the first quarter, instead of the previously reported one per cent pace.

The economy will mark 10 years of expansion in July, the longest on record. But momentum is slowing, with manufacturing struggling, the trade deficit widening again and the housing sector still mired in a soft patch.

While consumer spending appears to have regained speed in the second quarter, business spending on equipment is expected to have contracted further following Wednesday's weak report on durable goods orders in May. The trade war between Washington and Beijing is hurting both business and consumer confidence.

Trade and inventories accounted for the bulk of the surge in GDP growth in the last quarter. The trade deficit narrowed to US$905 billion in the first quarter, instead of US$903.6 billion as reported last month. The trade gap contributed 0.94 percentage point to GDP rather than the 0.96 percentage point estimated last month.

The US-China trade tensions have caused wild swings in the trade deficit, with exporters and importers trying to stay ahead of the tariff fight between the two economic giants. REUTERS