By Harriet Torry and Sarah Chaney
WASHINGTON -- The U.S. economy roared back in the first quarter,
growing at a rapid pace despite multiple headwinds, suggesting the
current expansion has more room to run amid its 10th year.
Gross domestic product -- the value of all goods and services
produced in the U.S., adjusted for inflation -- rose at a 3.2%
annual rate from January through March, the strongest rate of
growth for the first quarter in four years. Compared with the first
quarter a year ago, the economy grew 3.2%.
Helping drive growth were a rise in exports, a decline in
imports and higher inventory investment that helped offset weaker
growth in consumer spending and business investment, the Commerce
Department said Friday.
Imports fell following a jump in the second half of last year in
anticipation of potential tariffs the Trump administration had
threatened to impose. Those tariffs haven't gone into effect due to
continuing trade talks between Washington and Beijing.
Net exports -- exports minus imports -- added 1.03 percentage
points to the quarter's 3.2% GDP growth rate. That was the
category's largest boost to growth since the second quarter of last
year.
Consumer spending, however, which makes up two-thirds of
economic activity, rose at a mere 1.2% rate in the first quarter,
down from a strong 2.5% in the fourth quarter of 2018. Americans
reined in purchases of big-ticket items like vehicles and their
spending on services.
Still, the GDP report marked a turnaround from a gloomy start to
the year, when the economy looked close to stalling due to
challenges including a partial U.S. government shutdown, market
turmoil and slowing global growth. The Atlanta Fed's GDPNow tracker
at one point estimated 0.3% growth for the quarter. But the outlook
brightened as the Federal Reserve shelved plans to raise interest
rates this year, the shutdown ended in late January, stocks started
climbing toward new highs, China's economy strengthened and
steadily improving U.S. economic data trickled in, much of it
delayed by the shutdown.
National Economic Council Director Lawrence Kudlow called the
first-quarter reading a "blowout number."
"President Trump's policies are rebuilding the economy, and
actually the prosperity cycle we're in is gaining momentum, not
losing it," Mr. Kudlow said in an interview with CNBC. He credited
tax cuts, deregulation and trade policy changes aimed at juicing
growth for boosting production and investment in the economy.
The report offered evidence of solid, but not accelerating,
corporate demand.
"While the [first quarter] boost from net trade and state and
local government spending is unlikely to be repeated in [the second
quarter], the main message is that private consumption and
investment are slowing down only gradually," said Brian Coulton,
chief economist at Fitch Ratings, in a statement.
Nonresidential fixed investment -- which reflects business
spending on software, research and development, equipment and
structures -- rose at a 2.7% rate, pulling back from 5.4% in the
fourth quarter.
Spending on intellectual property grew strongly, at an 8.6%
pace, but spending on structures declined 0.8%.
Trade flows have been unpredictable in recent months,
particularly with China. Analysts say firms boosted imports in the
fourth quarter of 2018 ahead of an anticipated increase in tariffs
starting Jan. 1, which ultimately didn't materialize. Nor did
tariffs increase on March 1, due to progress in U.S.-China trade
talks.
Another volatile category, inventory investment, boosted growth
in the first quarter. The Commerce Department said nonfarm business
inventories added 0.67 percentage points to growth from January to
March for the third consecutive quarter of inventory accumulation.
The Commerce Department said the acceleration reflected an upturn
in manufacturing inventories for durable- and nondurable-goods
industries.
After stripping out the volatile categories of trade,
inventories and government spending, sales to private domestic
buyers rose at an annual rate of 1.3% -- a slower pace than the
overall GDP number.
The first quarter is traditionally the weakest of the year,
though seasonal adjustments in federal statistics should account
for that.
The current slow-but-sturdy expansion, which began in mid-2009,
is set to become the longest on record in the second half of
2019.
The housing sector was a headwind for growth in early 2019 as
residential investment fell at a 2.8% annual pace, marking the
fifth straight quarter of decline.
Overall government expenditures were up at a 2.4% annual rate in
the first quarter. While federal government spending was flat,
state and local outlays rose at a 3.9% annual rate. The Commerce
Department cited a turnaround in investment, most notably in
construction of highways and streets.
In a potentially alarming sign for policy makers at the Federal
Reserve, a measure of overall inflation dipped compared with the
prior quarter. The price index for personal-consumption
expenditures increased at a 0.6% pace in the first quarter,
compared with 1.5% in the final quarter of 2018. Core prices --
which exclude food and energy -- rose at 1.3% rate.
"That could open the door to a target rate reduction in the
months ahead, " Mr. Kudlow said. "The Fed is independent. I'm just
expressing my own view. The president happens to agree with that
view."
Asked how the Fed could justify a rate cut when the economy is
growing at such a robust pace, Mr. Kudlow said he doesn't subscribe
to the view that stronger growth leads to higher inflation.
Weak price pressures are a negative sign for Fed officials, who
view low inflation as a potential barrier toward further
interest-rate increases. Officials seek to keep inflation at 2%
because they see that as consistent with a healthy economy:
Inflation persistently below that level can be a signal of weak
demand. Fed policy makers signaled last month they didn't expect to
change rates in 2019. They hold their next policy meeting on
Tuesday and Wednesday.
While consumer spending was relatively weak in the first quarter
despite low unemployment, there are signs it is poised to pick up
in the second quarter. A separate report from the Commerce
Department last week said retail sales increased 1.6% in March, the
strongest month-over-month growth in a year and a half.
Early in the first quarter, households appeared spooked by the
government shutdown that dragged through late January and severe
winter weather. The Commerce Department estimated that the
furloughing of federal workers subtracted 0.3 percentage point from
growth in the first quarter after 0.1 percentage point in the
fourth.
--Kate Davidson contributed to this article.
Write to Harriet Torry at harriet.torry@wsj.com and Sarah Chaney
at sarah.chaney@wsj.com
(END) Dow Jones Newswires
April 26, 2019 11:14 ET (15:14 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.