U.S. economy slowed in first quarter after Trump's $1.5tn tax cuts

Apr 28, 2018, 11:00
U.S. economy slowed in first quarter after Trump's $1.5tn tax cuts

Real gross domestic product (GDP) increased at an annual rate of 2.3 percent in the first quarter of 2018 (table 1), according to the "advance" estimate released by the Bureau of Economic Analysis.

The results were slightly above Wall Street analysts' forecasts of 2 percent annual growth rate and represented an expected slowing from the fourth quarter's 2.9 percent growth rate.

Nancy Curtin, chief investment officer at Close Brothers Asset Management, was quoted by the BBC as saying: "These weaker first quarter growth figures are unsurprising in the context of historic seasonal weakness of this quarter in the United States, exacerbated by severe weather". Business-equipment spending and residential investment also cooled, with the government citing a downturn in brokers' commissions on home sales.

Looking at the data as a whole, Bloomberg's Sho Chandra concluded that "the results underline the difficulty of achieving President Donald Trump's goal of 3 percent sustained growth, despite corporate and individual tax cuts that went into effect in January".

The first quarter slowdown in consumer spending was offset by strength in business investment, which grew at a 6.1 percent rate, reflecting strong gains in oil and gas exploration, and by business inventory rebuilding, which added 0.4 percentage points to growth.

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Current-dollar GDP increased 4.3 percent, or $211 billion, to a $19.9 trillion level. The first-quarter 2018 reading was the slowest since 2013 and reflected a decline in vehicle, clothing and footwear purchases.

Beyond quarterly gyrations, underlying demand looks resilient, analysts said before the report.

Republicans who supported the administration's successful push to win passage of major tax cuts in December said the reports on wages and GDP growth were indications that the tax cuts and other parts of the Trump economic program were beginning to have an impact. Nonresidential fixed investment contributed 0.76 percentage points to top-line growth, with positive spending on inventories adding another 0.43 percentage points. The slow pace has helped extend the life of the current expansion, now the second longest in US history.

Government spending grew at a 1.2 percent rate, slowing from the fourth quarter's 3.0 percent pace.

Among the details, business spending on equipment rose 4.7 percent, following a three-year high of an 11.6 percent jump.

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Service-sector spending, on the other hand, rose modestly, up 2.1 percent, adding 0.97 percentage points to headline growth. Unemployment is at 4.1%, the lowest in 18 years. Housing investment was unchanged from the prior quarter after a 12.8% gain.

The slowdown in US consumer spending reflected slower auto sales as well as purchases on clothing, footwear, food and beverages, according to the report. Now it figures growth will be 3.3% - a significant upward revision.

"Right now, consumers are cautious", Navy Federal Credit Union economist Robert Frick said in a note to clients, adding the drop in durable goods spending "points to consumers avoiding big ticket items to conserve cash".

At the same time, Boeing said it's seeing solid global demand, while United Parcel Service said the USA economy is showing "healthy fundamentals".

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