US economy posts strong first quarter, but consumer spending slows

US GDP revised up to 2.1%, beating second quarter
Sofia Ordonez/CNNMONEY

The US economy grew at a better-than-expected rate in the first quarter, the Commerce Department reported Friday. The top-line number is a pleasant surprise in a quarter marked by a government shutdown, severe weather, Boeing’s troubles with the 737 Max, fears of an escalating trade war and the gradual fading of fiscal stimulus from tax cuts.

But digging into the details of the report reveals that weakness remains in the American economy.

The Bureau of Economic Analysis reported that gross domestic product grew at an annual rate of 3.2%, substantially above the projected 2.1%, buoyed by stronger state and local government spending, lower imports and business inventories.

The rate is a first estimate, and it may be revised as more data comes in over the next few weeks. It would have been even stronger, the BEA concluded, without the government shutdown — which subtracted 0.3 percentage points from growth in the first quarter rate. Federal spending was flat, since a rise in military spending was offset by a decline in non-defense spending.

The contribution from state and local government spending came largely as a result of highway and road construction, which localities have taken on while waiting for an infrastructure package from the federal government.

Underlying components in the report, however, suggest a broadly anticipated slowdown is still underway.

Growth was driven in part by higher inventories, especially in the manufacturing industry, which can indicate that businesses are stockpiling goods rather than selling them. Domestic private sales, which subtract out imports and exports as well as government spending, decelerated to half the rate of the previous quarter — the smallest gain in three years.

Meanwhile, consumer spending slowed, in part due to weak sales of goods, in particular light trucks. Business investment also slowed from the previous quarter, with agricultural machinery and office furniture posting the largest declines. The biggest boost for business investment came from intellectual property products.

“Taking out the oversized boosts from net trade, inventories and highways investment, which will all be reversed in the coming quarters, growth was only around 1%,” wrote Paul Ashworth, chief US economist with the research firm Captal Economics. “Under those circumstances, we continue to expect that overall growth will slow this year, forcing the Fed to begin cutting interest rates before year-end.”