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Consumer Spending Is at Its Slowest Pace Since 2009

by Reuters / / Source: Reuters
People walk past the Apple Store at the Los Cerreitos Center mall in Cerritos, California. REUTERS/Bret Hartman

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The U.S. economy grew at its weakest pace in three years in the first quarter as consumer spending barely increased and businesses invested less on inventories, in a potential setback to President Donald Trump's promise to boost growth.

Gross domestic product increased at a 0.7 percent annual rate also, as the government further cut defense spending, the Commerce Department said on Friday in its advance estimate. That was the weakest performance since the first quarter of 2014.

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The economy grew at a 2.1 percent pace in the fourth quarter. The pedestrian first-quarter growth pace is, however, not a true picture of the economy's health.

The labor market is near full employment, generating stronger wage growth, and consumer confidence is near multi-year highs. That suggests the mostly weather-induced sharp slowdown in consumer spending is probably temporary.

First-quarter GDP also tends to underperform because of difficulties with the calculation of data that the government has acknowledged and is working to rectify.

"Weak, but GDP growth has tended to be below trend in first quarters in recent years, cautioning against extrapolating," said Jim O'Sullivan, chief U.S. economist at High Frequency Economics in Valhalla, New York. "We expect reacceleration in the second quarter."

Even without the seasonal quirk and temporary restraints, economists say it would be difficult for Trump to fulfill his pledge to raise annual GDP growth to 4 percent, without increases in productivity.

Trump is targeting infrastructure spending, tax cuts and deregulation to achieve his goal of faster economic growth. On Wednesday, the Trump administration proposed a tax plan that includes cutting the corporate income tax rate to 15 percent from 35 percent, but offered no details.

Prices for government bonds fell after the data, while the dollar rose. U.S. stock futures trimmed gains.

Growth in consumer spending, which accounts for more than two-thirds of U.S. economic activity, braked to a 0.3 percent rate in the first quarter. That was the slowest pace since the fourth quarter of 2009 and followed the fourth quarter's robust 3.5 percent growth rate.

The weakness in consumer spending is blamed on a mild winter, which undermined demand for heating and utilities production. Higher inflation, which saw the personal consumption expenditures index averaging 2.4 percent in the first quarter — the highest since the second quarter of 2011 — also weighed on consumer spending.

Government delays issuing income tax refunds to combat fraud also curbed consumer spending. But with savings rising to $814.2 billion from $778.9 billion in the fourth quarter, consumer spending is likely to pick up.

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