US economy grew 2.3% in Q1

[WASHINGTON] The economy grew at an annual rate of 2.3 per cent in the first quarter, the government reported Friday, offering a preliminary glance at how last year's sweeping package of tax cuts is affecting consumers and businesses this year.

During the first three months of 2018, the economy was whacked around like a pinball. The stock market took investors on a giddy ride. President Donald Trump imposed tariffs on allies and rivals alike, stoking fears of a trade war. And the revamped tax code shifted business incentives and started to put more money in workers' paychecks.

Still, the economy ended up puttering along just a bit above the average yearly growth rate that it had registered since the recession ended nearly nine years ago.

That pace is below the stronger 2.9 per cent annualized rate recorded in the fourth quarter of 2017, and falls short of Trump's goal of at least 3 per cent. Most forecasters, however, expect quarterly growth to float around the 3 per cent mark for the rest of the year.

Carl Tannenbaum, chief economist of Northern Trust in Chicago, said economists had expected economic growth to ease in the quarter, "yet maintain optimism for the remainder of the year." As a result, he said he didn't expect the Federal Reserve to revisit its timetable for raising interest rates.

Expectations about the first-quarter figure had fluctuated as pieces of the puzzle emerged. Imports fell and exports rose more than expected, narrowing the merchandise trade deficit for the first time in six months. Orders of durable goods remained sluggish, but revived somewhat as commercial aircraft orders surged in March. And although consumers continued to express a lot of confidence, they pulled back on their spending.

Holiday shopping in the final quarter of 2017 had bumped up consumer spending - which accounts for more than two-thirds of the nation's economic activity - to 4 per cent. That surge receded when the new year started.

Although the tax overhaul promised to increase take-home pay, its effects may have been blunted for several reasons, including the time it took for the IRS to produce updated withholding tables and for payroll managers to adjust their systems. A poll of registered voters done in April and released this week by Politico/Morning Consult found that only about a fifth of those surveyed were noticing more money in their paychecks.

Nonetheless, Kathy Bostjancic, chief US financial economist at Oxford Economics, said, "I think there is a legitimate question as to how much of the tax cuts get saved to pull down debt and how much actually gets spent."

As for business spending, many of the tax incentives were aimed not at immediate investment decisions, but at those in the medium term.

For several years, first-quarter growth rates have been weaker than the longer-term trends indicated, only to rebound in later months. This year, the result could reflect a falloff in spending after an unusual surge that followed the havoc wrought by late-summer hurricanes. Severe winter weather could have also slowed consumption. But some analysts wonder if data adjustments are part of the problem.

Government economists try to account for seasonal changes, but the corrective measures may be only partially successful. "There's a little weakness in Q1 and then the other quarters are artificially inflated because of that," Ms Bostjancic said.

In any case, the gross domestic product estimate released Friday by the Commerce Department is not the final word on the first quarter. The estimate will be revised twice in the next couple of months. In the past, the final number has higher or lower by as much as a percentage point.

This GDP report, though, is the latest that the Federal Reserve will have when its policymakers meet next week. At last month's meeting, Fed officials not only raised interest rates, they also indicated that they planned two more increases this year. Their concern is that a tight labor market will push up inflation as employers increase wages to compete for workers.

For most Americans, who have seen little income growth in recent decades, fears of steeper inflation seem overblown. That is why some economists warn against raising rates too much and too fast, arguing that the increases will choke off the recovery.

At the conclusion of the March meeting, Jerome  Powell, the new Fed chairman, said: "We're trying to take that middle ground."

Michael Pearce, a senior economist at Capital Economics, said he did not expect the Fed's outlook to change much, regardless of Friday's report.

"The Fed already acknowledged some of the incoming data and that they think it could strengthen this year," he said. Last month, the central bank announced that it had raised its median estimate for annual growth this year to 2.7 per cent, from 2.5 per cent.

NYTimes