The U.S. economy grew at a surprising 3.2 per cent annual rate in the first three months of the year, but economists say that economic growth is built on shaky foundations.
About half the gain reflected two factors not expected to last — a big jump in stockpiling by businesses and a sharp contraction in the trade deficit. The economy managed to throw off the partial government shutdown that began in December.
“The acceleration was built on shaky foundations, as half of the quarter’s growth was due to a buildup inventories (0.7 percentage points) and a decline in imports, which meant net trade added one percentage point to growth,” said TD Bank economist Leslie Preston.
“The boost from inventories and weakness in imports are likely to be reversed in the second quarter, dampening economic growth,” she said.
She said the Fed’s decision to slow its pace of raising rates helped to boost the expansion. But trade tensions, a weak housing market, slow consumer spending and a projected global slowdown overhang the results.
Container ships sit moored at a dock at the Port of Seattle. Imports were curtailed in the quarter, in part because of tariffs. (Elaine Thompson/Associated Press)
The advance in the gross domestic product, the broadest measure of economic health, marks an acceleration from a 2.2 per gain in the previous October-December period, the Commerce Department reported Friday.
President Donald Trump boasted about the growth as evidence his economic program is working, calling it “far above expectations.” Speaking to reporters before leaving Washington for a speech to the National Rifle Association, Trump termed the GDP figure an “incredible number” and said, “Our economy is doing great. Number One in the world.”
String of weak first quarters
It was the strongest first quarter growth rate since 2015. In recent years, GDP has been exceptionally weak in the first quarter. There had been fears growth could dip below one per cent this year due to a variety of adverse factors such as the December stock market nosedive, rising weakness in key economies overseas, the U.S. trade war with China and a 35-day partial government shutdown that ended in January.
But the economy shrugged off those concerns, helped by an announcement in early January from the Federal Reserve that after raising rates four times last year, it was declaring a pause on further rate hikes. That spurred a stock market rebound by easing concerns that the central bank might overdo its credit tightening and send the country into a recession.
In the first quarter, inventory rebuilding added 0.7 percentage point to growth, while a falling trade deficit boosted growth by a full percentage point. Analysts think both of those factors will reverse in the current quarter. Analysts at Macroeconomic Advisers said they expect GDP will slow to a 1.8 per cent rate in the second quarter.
“The drivers of growth in the first quarter are unlikely to persist,” said Gus Faucher, chief economist at PNC.
Consumer spending sluggish
Consumer spending, which accounts for 70 per cent of economic activity, slowed to growth at a rate of just 1.2 per cent in the first quarter. In particular, spending on durable goods fell at a rate of 5.3 per cent, the biggest decline in a decade, led by a sharp drop in light truck sales.
Tariffs on imports have also raised prices for consumers.
RBC senior economist Nathan Janzen expects consumer spending to pick up as wages rise.
The strength in the U.S. could be good for the Canadian outlook, he said in a note to clients, but that won’t change the Bank of Canada’s decisions to go slower on interest rates.
“We don’t expect any change in tone from Fed policymakers following Wednesday’s FOMC meeting after the dovish shift just six weeks earlier. As in Canada, though, more positive economic reports still argue against market pricing, implying that the next move on rates is more likely to be a cut than a hike.”
U.S. government spending was up 2.4 per cent reflecting increases in highway construction at the state and local level. The government estimated that the 35-day partial federal shutdown trimmed 0.3 percentage point from growth in the first quarter after trimming fourth quarter growth by 0.1 percentage point.
For the year, economists believe GDP will expand 2.4 per cent, down from last year’s 2.9 per cent gain, as the boost from the 2017 tax cuts and increased government spending over the past two years starts to fade.
There are factors that could help lift growth in coming quarters. The global economy appears on better footing, given improvements in such major economies as China, and a trade war between the world’s two largest economies that appears closer to being resolved than it did at the start of the year.
Mark Zandi, chief economist at Moody’s Analytics, said he expects growth for this year to be around 2.2 per cent, close to the average for the past 10 years.
“We got a temporary boost to growth last year because of the tax cuts but that money has been spent so we are back to the kind of growth we have had,” Zandi said. “I think we are back to the 2% world we have been in since the recession ended.”