U.S. economic growth slowed to 2.3% pace in first quarter

The U.S. economy slowed to a moderate 2.3 per cent annual growth rate in the first quarter as consumer spending turned in the weakest performance in nearly five years. Still, the January-March increase came in better than expected, supporting hopes for a solid rebound for the rest of the year.

The Commerce Department reported Friday that the gain in the gross domestic product, the economy's total output of goods and services, followed a 2.9 per cent rise in the fourth quarter and gains above three per cent in the previous two quarters.

Many economists had forecast that growth would slip below two per cent in the first quarter, reflecting a big pullback by consumers after a torrid pace of spending in the fourth quarter. Recent history has shown a pattern of weakness in the first quarter, reflecting in part seasonal data quirks. Analysts expect growth to surpass three per cent in the current quarter.

Consumer spending, which accounts for 70 per cent of economic activity, decelerated sharply from a four per cent growth rate in the fourth quarter to a 1.1 per cent pace in the first quarter. That was offset somewhat by gains in inventory building by businesses and a lower trade deficit.

Analysts viewed the first quarter slowdown as temporary, with consumers expected to boost their spending amid a low unemployment rate and the initial impact of the $1.5 trillion US in tax cuts that Congress approved in December.

"Apart from a temporary breather in consumer spending and housing markets, the U.S. economy showed good momentum in business spending and exports in Q1, and has every reason to return to a near three per cent rate in coming quarters," said BMO Capital Markets senior economist Sal Guatieri in a note.

Over the past four quarters, GDP growth has averaged 2.9 per cent, just below the three per cent projection the Trump administration used in its budget for next year.

While the administration expects the economy to grow at rates of three per cent for the rest of this decade, private analysts are less optimistic. They say that growth will be bolstered by the tax cuts and increased government spending for this year and next year. But then they expect growth levels to return to the lacklustre rates of around two per cent as the boost from fiscal stimulus wears off and the economy starts to feel the adverse effects of rising interest rates.

The Federal Reserve is expected to keep lifting its key interest rate to prevent unwanted inflation, and big federal budget deficits are likely to push up government borrowing costs.

"The Fed already knew that the economy had healthy momentum to start 2018, but Q1's better-than expected outturn probably puts some upside risk to their outlook," TD senior economist Leslie Preston said in a commentary.

"Our outlook for two more Fed hikes this year, continues to have more upside than downside risk to it and today's GDP result only shifts those risks very slightly at the margin," Preston wrote.