Economic Preview: First-quarter GDP slows to 2.3%

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Reuters

The U.S. economy slowed in the first quarter, but not as much as expected.

The numbers: The U.S. grew in the first quarter at the slowest pace in a year owing to a big pullback in consumer spending, but the economy held up better than expected owing to strong business investment and a smaller trade deficit.

Economists polled by MarketWatch had forecast a 2% increase in gross domestic product. The U.S. had grown around 3% in the prior three quarters.

The rate of inflation rose to 1.8% from 1.7% year over year, reflecting the recent trend of rising prices.

What happened: Consumer spending rose a scant 1.1% after a 4% increase in the fourth quarter that was the biggest in three years. Households spent less on new cars and clothes, among other things.

Americans spent a bundle during the best holiday shopping season since 2010, but they took a breather in early 2018 to pay off their bills and rebuild their savings. Severe bouts of bad weather also hinder spending.

Yet businesses picked up the slack. investment in structures doubled to 12.3% and spending on equipment was up 6.1%.

The value of inventories, which adds to GDP, increased to $33.1 billion from $15.6 billion.

Residential investment was flat.

Exports rose 4.8% and imports rose a slower 2.6%. A smaller trade deficit adds to GDP.

Inflation as measured by the PCE price index rose at a 2.7% annual rate in the first quarter. The year over year rate of Inflation edged up to 1.8% from 1.7%.

Big picture: The economy already shows signs of speeding up again after the usual winter lull, though it will take a few more weeks to get a better read.

A spring rebound would fit a longstanding pattern. For nearly two decades GDP has grown twice as fast in the final nine months of the year vs. the first three months, an anomaly that traces in part to a faulty government formula in accounting for seasonal variations.

What’s greasing the skids for the economy is a roaring labor market, rising pay and higher business investment. The recent Trump tax cuts have added another boost.

The road ahead is not entirely free and clear, though.

Inflation has been creeping higher and that may push the Federal Reserve to raise interest rates more aggressively, a strategy that could slow the economy and cause further declines in the stock market. Rising trade tensions and higher oil prices are also giving businesses and consumers cause for worry.

Market reaction: The Dow Jones Industrial Average DJIA, +0.99% and Standard & Poor’s SPX, +1.04% were set to open lower in Friday trades. The 10-year Treasury yield TMUBMUSD10Y, -0.28%   was little changed at 2.97%.