During the first quarter of 2017 the US economy grew at its slowest pace since 2014, after consumer spending slowed and businesses invested less in inventories. The GDP increased at rate of just 0.7 percent during the first three months of the year, according to the first estimates released by the Bureau of Economic Analysis, down from 2.1 percent and 3.5 percent in the second half of last year. At the same time household finances have increased, boosted by stock market gains, gradually rising wages as well as a strong labor market. US exports also increased 5.8 percent, outpacing the 4.1 percent rate increase in imports, reportedly having a neutral impact on GDP growth.
The decline in growth is due to the meek 0.3 percent growth rate of consumer spending, which accounts for approximately 71 percent of the United States overall economic growth. The slowdown is seen to be the result of less spending on long-lasting goods such as computers, motor vehicles, energy, etc.
“Reduced spending on motor vehicles led to a contraction in durable expenditures (-2.5%), while seasonably warm temperatures hit spending on utilities, contributed to a weak spending on services (0.4%),” TD Securities’ Brittany Baumann stated in regards to where the significant spending drop came from.
During the same period, residential investment posted a 13.7 percent gain and business structures grew 22.1 percent. “The rise in equipment investment indicates that firms are expanding capacity in anticipation of rising demand. Likewise, a strong showing of residential investment, along with other positive signals from the housing sector, indicates that the household sector remains confident in the economic outlook,” said a Barclays economic research team, led by Michael Gapen.
Some have argued that the consumer spending figure on whole is a sharp divergence from recent sentiment surveys which show that even though consumer optimism has come down from increased levels following the presidential election, Americans continue to have a positive outlook on the current and long-term economic situations.
“The soft data is off the charts. Typically there’s a high correlation between sentiment readings and what transpires by way of spending… but in the first quarter, it didn’t manifest quite the same. I look at it more of an aberration to first-quarter activity that something indicative of a pattern and expect sentiment to translate into a relatively sturdy if not strong spending pattern,” remarked Mark Luschini, chief investment strategist at Janny Montgomery Scott.
Disposable income rose at a rate of 3.4 percent during the first quarter, along with the personal saving and inflation rates. The core personal consumption expenditures index, used to measure prices paid for goods and services, rose to 2 percent in the first quarter as expected from 1.3 percent in the last quarter. Luschini has argued this is evidence that as inflation has continuously crept higher, consumer have continued to become more disciplined in their spending, which has consequently negated some of the benefits that have come to be expected with wage increases.
“[First quarter] GDP growth has tended to be sluggish this cycle and also tended to fall short of growth in the other three quarters. Put in this context, today’s data should not be viewed being disturbing, but rather history repeating itself,” Ward McCarthy stated.
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