United States economic growth slows to 0.7% in first quarter

Today’s report shows the fourth year in a row that the advance release of first quarter GDP has been lower than 1 percent, noted TD Economics.

He said that strong business and consumer sentiment “must be released from the regulatory and tax shackles constraining economic growth”. “Indeed, since 2010, the average for first-quarter growth is only 0.9 per cent, compared with 2.4 per cent in each of the other three quarters”, said Paul Ashworth, an economist at Capital Economics.

There were signs of a Trump-induced revival of business activity in the quarter. He plans to aggressively reduce taxes, which could leave the federal government short trillions of dollars in revenue unless the budget is bolstered by strong economic growth.

The Fed’s recent Beige Book – an accounting of business anecdotes across the bank’s 12 districts – revealed more solid evidence of tightness in the labor market that was translating into higher labor costs.

There are also fears that consumer spending might come under further pressure because United States banks have begun to tighten conditions on credit cards and other consumer loans as more of their customers fall behind on repayments. Exports rose at a 5.8 percent rate, and imports rose at a rate of 4.1 percent.

In unveiling an outline of the Trump administration’s tax proposals on Wednesday, US Secretary of the Treasury Steven Mnuchin said he believed growth above 3 percent would be achievable.

On the campaign trail, Trump criticized former President Obama for lackluster economic growth after the economy dug out of an historically bad recession and near economic collapse. Analysts surveyed by Reuters expected growth of 1.2 percent last quarter. Weak inventory investment dragged down the overall number in GDP growth by almost a percentage point.

Additionally, the spending of consumer also took a hit from government took time in issuing income tax refunds to combat fraud.

Ian Shepherdson of Pantheon Macroeconomics said if these distortions were excluded, growth would probably have been closer to two percent.

The first quarter slowdown in the GDP was not entirely unexpected. In the last quarter of 2016, consumption rose by 3.5 percent. This is weakest performance since the economy contracted by 1.2 percent in the second quarter of 2014.

A recovery in oil prices helped sustain growth in this category, with mining, exploration, shafts and wells skyrocketing to 449 percent, an all-time record, up from 23.7 percent in the prior quarter. This is also largely attributable to good weather with future quarters showing considerably slower growth. Manufacturing accounts for a grossly disproportionate share of equipment investment.

Details within Friday’s report offered a mixed outlook. But for the full year of 2016, it grew by only 1.6 percent.

“Fed hawks will seize on this report”, Shepherdson said.