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Growth in the first quarter was dampened by weak consumer spending



WASHINGTON (Reuters) – Economic growth in the US slowed somewhat more sharply in the first quarter than initially anticipated, as consumer spending rose at its weakest in nearly five years, but activity is already picking up against the backdrop of labor market tightening and taxes cuts.

Buyers look at washing machines and dryers at a Home Depot store in New York on July 29, 201
0. REUTERS / Shannon Stapleton

Gross domestic product rose 2.2 percent a year, the Commerce Department said on Wednesday, with estimates of GDP for the first quarter instead of the previously reported 2.3 percent. While corporate spending was stronger than initially anticipated, inventory investment was far lower than the government reported last month.

The economy grew by 2.9 percent in the fourth quarter. Economists expect a $ 1.5 trillion income tax reduction package, which came into force in January, to boost faster economic growth this year and bring annual GDP growth close to the Trump's 3 percent target ,

Growth is also likely to be boosted by increased government spending. April data, including retail, trade and industrial production, indicate that the economy rebounded early in the second quarter. Growth estimates for the second quarter are over 3 percent.

Economists had expected that GDP growth in the first quarter would not be revised at 2.3 percent.

"With deficit-driven tax cuts and a sharp increase in federal spending, growth will soon rise again," said Scott Hoyt, senior economist at Moody's Analytics in West Chester, Pennsylvania.

As an alternative measure of economic growth, gross domestic income (GDI) rose at 2.8 percent in the January-March quarter, the fastest since the third quarter of 2016. The GDI rose 1.0 percent in the fourth quarter.

The average of GDP and GDI, also known as gross domestic product, which is considered a better measure of economic activity, rose by 2.5 percent in the first quarter. This corresponds to a growth rate of 2.0 percent in the previous period.

The earnings side of the growth ledger was supported by corporate earnings after taxes, which rose 5.9 percent in the last quarter, after rising 1.7 percent in the fourth quarter. The government lowered the corporate tax rate from 35 percent in January to 21 percent.

Wages were also raised by lower tax rates. Revenues in the first quarter increased $ 119.5 billion, an increase of $ 3.1 billion from previous estimates.

STRONG LABOR MARKET

Regardless, ADP's National Employment Report on Wednesday showed that private sector employment increased 178,000 in May, up 163,000 in April. The data was released before the government's more comprehensive employment report on Friday.

According to a survey of economists conducted by Reuters, non-farm payrolls are expected to have increased by 188,000 jobs this month, having gained 164,000 jobs in April. The unemployment rate is still projected at an almost 17/2 annual low of 3.9 percent.

"Employment growth is still strong in this phase of expansion, but it slows down as companies struggle to find skilled workers to fill open positions," said Scott Anderson, Bank of the West Chief Economist in San Francisco.

Steady growth and a robust labor market are encouraging the Federal Reserve to raise rates next month. The US Federal Reserve raised borrowing costs in March and forecast at least two more interest rate hikes this year.

U.S. The financial markets were little moved by the data, as investors keep an eye on political developments in Italy. The dollar fell against a basket of currencies and US Treasury prices were lower. Stocks on Wall Street rose.

Consumer spending growth, which accounts for more than two-thirds of US economic activity, slowed to 1.0 percent in the first quarter and not 1.1 percent, as before. It was the slowest pace since the second quarter of 2013, following the robust fourth quarter of 4.0 percent.

Companies accumulated inventories at $ 20.2 billion instead of last month's estimated $ 33.1 billion in revenue. Warehouse investment contributed 0.13 percentage points to GDP growth, instead of 0.43 percentage points. Lower inventories suggest GDP growth in the second quarter.

The trade deficit was slightly larger than initially assumed during the first three months of the year and had no impact on the GDP growth rate. Previously, it was estimated that sales increased by 0.20 percentage points.

It could contribute to GDP growth in the second quarter, as another Ministry of Commerce report showed that the commodity trade deficit in April fell 0.6 percent to $ 68.2 billion.

Equipment spend was revised to a 5.5 percent growth rate in the January-March quarter, up from the 4.7 percent rate estimated last month. This was still modest investment after double-digit growth in the second half of 2017. Commodity data for April suggest that equipment spending may continue to slow in the second quarter.

Housing investment declined 2.0 percent in the first quarter, instead of remaining unchanged as reported last month.

Reporting by Lucia Mutikani; Arrangement by Andrea Ricci


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