Gross domestic product probably increased at a 2.0 percent annual rate,
according to a Reuters survey of economists, also held back by a moderation in
business spending on equipment as well as a widening of the trade deficit and
decline in investment in homebuilding.
Those factors likely offset an increase in inventories. The economy grew
at a 2.9 percent pace in the fourth quarter. The government will publish its
snapshot of first-quarter GDP on Friday at 8:30 a.m. (1230 GMT).
The anticipated tepid first-quarter growth will, however, probably not
be a true reflection of the economy, despite the expected weakness in consumer
spending. First-quarter GDP tends to be soft because of a seasonal quirk. The
labor market is near full employment and both business and consumer confidence
are strong.
“I would not lose sleep over first-quarter GDP, there is the residual
seasonality issue,” said Ryan Sweet, a senior economist at Moody’s Analytics in
West Chester, Pennsylvania. “Overall the economy is doing very well and will
continue to do well this year and into 2019.”
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. Lower corporate and individual tax rates
as well as increased government spending will likely lift annual economic
growth to the administration’s 3 percent target, despite the weak start to the
year.
Federal Reserve officials are likely to shrug off weak first-quarter
growth. The U.S. central bank raised interest rates last month in a nod to the
strong labor market and economy, and forecast at least two rate hikes this
year.
Minutes of the March 20-21 meeting published earlier this month showed
policymakers “expected that the first-quarter softness would be transitory,”
citing “residual seasonality in the data, and more generally to strong economic
fundamentals.”
LACKLUSTER CONSUMER SPENDING
Economists estimate that growth in consumer spending, which accounts for
more than two-thirds of U.S. economic activity, braked to below a 1.5 percent
rate in the first quarter. That would be the slowest pace in nearly five years
and follows the fourth quarter’s robust 4.0 percent growth rate.
Consumer spending in the last quarter was likely held back by delayed
tax refunds and impact of tax cuts. Rebuilding and clean-up efforts following
hurricanes late last year probably pulled forward spending into the fourth
quarter.
“Our new consumer survey found that 37 percent of consumers thought they
didn’t get any extra income from the tax cut or did not know what to do with
it,” said Michelle Meyer, head of U.S. economics at Bank of America Merrill
Lynch in New York.
“It is possible this means that there is a lag in the consumer response
to tax cuts.”
Business spending on equipment is forecast to have slowed after
double-digit growth in the second half of 2017. The expected cooling in
equipment investment partly reflects a fading boost from a recovery in
commodity prices. Economists expect a marginal impact on business spending on
equipment from rising interest rates and more expensive raw materials.
“While we do not expect rising rates to crush equipment spending, a
slowdown nevertheless appears in store,” said Sarah House, a senior economist
at Wells Fargo Securities in Charlotte, North Carolina. “Higher interest rates
will hurt at the margin.”
Investment in homebuilding is forecast to have declined in the first
quarter after rebounding in the October-December period. Government spending
probably contracted after two straight quarterly increases. Spending is,
however, expected to rebound in the second quarter after the U.S. Congress
recently approved more government spending.
Trade was likely a drag on GDP growth for a second straight quarter
after royalties and broadcast license fees related to the Winter Olympics
boosted imports.
With consumer spending slowing, inventories probably accumulated in the
first quarter. Inventory investment is expected to have contributed to GDP
growth after subtracting 0.53 percentage point in the fourth quarter.