US economy stalls, records slowest growth in 2 years

WASHINGTON — United States economic growth braked sharply in the first quarter to its slowest pace in two years as consumer spending softened and a strong dollar continued to undercut exports, but a pick-up in activity is anticipated given a buoyant labour market.

Gross domestic product (GDP) ­increased at a 0.5 per cent annual rate, the weakest since the first quarter of 2014, said the Labor Department on Thursday (April 28) in its advance estimate, ­also as businesses stepped up efforts to ­reduce unwanted merchandise clogging up warehouses.

The economy was also blindsided by cheap oil, which has hurt the profits of oil field companies such as Schlumberger and Halliburton, resulting in business spending contracting at its fastest pace since the second quarter of 2009, as the recession was ending.

“Although growth was weak to start the year, the soggy results are consistent with seasonal trends over the past decade. Expectations for growth for the remainder of the year remain bright,” said Mr Jim Baird, chief investment officer at Plante ­Moran Financial Advisors in Kalamazoo, Michigan.

Economists polled by Reuters had forecast the economy expanding at a 0.7 per cent rate in the first quarter. The economy grew at a 1.4 per cent pace in the fourth quarter.

Almost all sectors of the economy weakened in the first quarter, with the housing market the lone star.

But the slowdown in growth could be temporary, given a fairly robust jobs market. A separate report from the Labor Department showed first-time applications for unemployment benefits rose less than expected last week and the four-week average of initial claims fell to its lowest since 1973.

Employment gains averaged 209,000 jobs a month in the first quarter. Also suggesting a pickup in growth in the second quarter, the Institute for Supply Management’s manufacturing and nonmanufacturing surveys, which are closely correlated to economic activity, rebounded in recent months.

While the Federal Reserve on Wednesday acknowledged that economic activity had “slowed”, it also said ­labour market conditions had “improved further”. The US central bank appeared to view the threats from the global economy and financial markets as having diminished.

The Fed left its benchmark overnight interest rate unchanged and suggested it was in no hurry to tighten monetary policy further. It hiked rates in December for the first time in nearly a decade.

Economists also believe the model used by the government to strip out seasonal patterns from data is not fully accomplishing its goal, despite recent steps to address the problem.

Residual seasonality has plagued first-quarter GDP, with growth ­underperforming in five of the past six years since the recovery started in mid-2009.

US government bond prices rose marginally, while the dollar was little changed against a basket of currencies.

CONSUMER SPENDING COOLS

Consumer spending, which accounts for more than two-thirds of US economic activity, increased at a 1.9 per cent rate. That was the slowest since the first quarter of 2015 and marked a deceleration from the fourth quarter’s 2.4 per cent rate.

Households have been frugal, cutting back on purchases of long-lasting manufactured goods, such as automobiles, despite cheap petrol. Households appear to have socked away modest wage gains from the tightening labour market and the petrol savings. They have also reduced their debt.

Income at the disposal of households after accounting for taxes and inflation increased 2.9 per cent in the first quarter after rising 2.3 per cent in the prior period. Savings rose to a lofty US$712.3 billion (S$959.9 billion) from $678.3 billion in the fourth quarter.

Higher savings and a lower debt load augur well for an acceleration in consumer spending.

Despite consumer spending softening, inflation picked up in the first quarter. A price index in the GDP ­report that strips out food and e­nergy costs increased at a 2.1 per cent rate, the fastest since the first quarter of 2012 and an acceleration from the fourth quarter’s 1.3 per cent pace.

With consumer spending tepid, businesses continued to place fewer orders for goods and ramped up ­efforts to reduce an inventory bloat. In the first quarter, businesses ­accumulated US$60.9 billion worth of ­inventory, down from $78.3 billion in the fourth quarter.

There were strong gains in residential investment in the first quarter, the only bright spot in the economy. REUTERS