US Growth Cools to 2.3% While Compensation Costs Accelerate

28 April, 2018, 11:01 | Author: Darnell Patrick
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On Friday the Commerce Department released its quarterly report on Gross Domestic Product (GDP), the value of all goods and services produced in the nation.

The slight pullback in the pace of business investment from the fourth quarter could have been due to the strong incentives businesses had to invest in the fourth quarter of a year ago before the corporate tax rate declined from 35% to 21%.

The slowdown in GDP growth came as consumer spending rose by just 1.1 percent in the first quarter compared to the 4.0 percent jump seen in the fourth quarter. The United States economy, at first estimate, grew by 2.9 percent, year-over-year, in the first quarter of 2018.

The Fed, which wants to keep price increases to about 2 percent annually, raised short-term interest rates in March for the sixth time since 2015 when they were near zero. They expect a bounce back in the coming months, and preliminary estimates point to 3.6% growth in the second quarter.

Another factor may have led to subdued growth figures: First-quarter growth has tended to be weaker than other quarters in recent years, potentially from seasonal quirks in the data that dissipate in subsequent months.

"Earnings have stabilised, and the benefits of last year's tax reforms are starting to materialise, though the actual spending of money will take time", Curtin added. The saving rate rose from the fourth quarter to the first, meaning households pocketed added disposable income rather than spending it.

Commerce Department analysts reported worrying signs of rising prices with a key price index, excluding volatile food and energy costs, rising 2.5 percent.


The slowdown in US consumer spending reflected slower auto sales as well as purchases on clothing, footwear, food and beverages, according to the report.

While not great, the report for first quarter GDP in 2018 is far from disappointing. J.P. Morgan economist Michael Feroli said that "much of the upside surprise in the headline number was accounted for by stronger-than-expected federal government spending", which he expects will be revised lower.

Consumer spending increased by 1.1% in the first quarter, well below the fourth quarter's rapid 4% rate.

It's not a bad report, and this quarter has chronic issues with metrics. The expected cooling in equipment investment partly reflects a fading boost from a recovery in commodity prices.

Residential investment was also flat in the first three months of the year, possibly due to winter storms and higher short-term interest rates, according to analysts. Joseph Lavorgna, chief economist at the investment bank Natixis, points out that GDP revisions are typically quite large, more than a full percentage point on average since 2000. Investment in new structures almost doubled to 12.3 percent.

Trump has predicted continuous 3 percent GDP growth and based deficit-expanding policies like tax cuts and increased spending on those levels, despite many economists saying they were unsustainable. His goal was derailed in the first three months as consumers trimmed spending.

Nonresidential fixed investment, a measure of corporate spending on structures and equipment, grew at 6.1 percent in the first quarter, down from 6.8 percent in the previous quarter.

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