US GDP Climbs More Than Expected In First Quarter

Alicia Cross
April 28, 2018

A bit of inflation is considered a good thing, but some economists worry that the $1.9 trillion in debt the CBO predicts the USA will take on due to the tax plan will increase inflation too rapidly.

Economists expect growth will accelerate in the second quarter as households start to feel the impact of the Trump administration's $1.5 trillion income tax package on their paychecks.

"Growth rates around 3 percent are not sustainable but for the next couple of years all the government stimulus is going to provide a lot of economic juice", said Mark Zandi, chief economist at Moody's Analytics. Analysts expect a rebound as tax cuts take hold amid a strong job market, though tailwinds such as low inflation and borrowing costs are starting to dissipate, and trade tensions represent a headwind.

Officials from the Federal Reserve are expected to overlook the luke-warm growth of the first-quarter.

The year is off to a sluggish start for the USA economy - and a decline in spending on clothing and footwear is partly to blame. The figure will be revised twice in the next couple of months as more data becomes available.

Residential investment was flat during the first quarter.

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

While not great, the report for first quarter GDP in 2018 is far from disappointing.

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Wages and salaries were up 2.7 percent in the 12 months through March compared to 2.5 percent in the year to December. On the one hand, economic growth slowed from the 2.9 percent rate recorded in the fourth quarter, despite the tax cuts taking effect in January. Excluding food and energy prices, the PCE price index increased 2.5 percent.

The U.S. central bank has a 2 percent inflation target.

Paul Ashworth, chief United States economist at Capital Economics, said the latest GDP figures were "something of a disappointment since the tax cuts should have provided an immediate boost".

The dollar initially rose against a basket of currencies after the data, but gave up gains to trade little changed. That was the slowest pace since the second quarter of 2013 and followed the fourth quarter's robust 4.0 percent growth rate. This likely reflects delayed tax refunds. At that rate, sustained over many years, the tax "plan will pay for itself with growth", Treasury Secretary Steven Mnuchin said last week, not for the first time. Goods exports increased 6.1 percent in the first quarter, which was more than enough to offset the 2.1 percent rise in goods imports.

"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". Housing investment was unchanged from the prior quarter following a 12.8 percent gain. "So here's to 3.7% growth in 2Q!"

Over the past four quarters, GDP growth has averaged 2.9 percent, just below the 3 percent projection the Trump administration used in its budget for next year. His goal was derailed in the first three months as consumers trimmed spending.

Nonresidential fixed investment, or spending on equipment, structures and intellectual property, increased at a still-solid 6.1 percent annualized pace, contributing 0.76 percentage point to growth.

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