The US economy grew faster than expected in the first quarter, according to the Commerce Department’s initial estimate of gross domestic product released on Friday.
GDP, the value of all goods and services produced within the US, increased at an annualized rate of 2.3%, down from 2.9% in the fourth quarter. Economists polled by Bloomberg had forecast 2% growth.
Consumer spending, the biggest contributor to the economy, slowed to a 1.1% growth rate from 4% in the fourth quarter. But this slowdown was partly offset by strong business investment.
According to Pantheon Macroeconomics’ Ian Shepherdson, consumer spending likely slowed because its surge late last year was unsustainable, as people replaced items destroyed by the summer hurricanes. Shoes, clothes, and cars were among the items that Americans spent less on in Q1 compared to Q4. Also, spending slowed even though there was a 3.4% increase in disposable income, the most since 2015 due to tax cuts.
During most of this recovery, first-quarter growth has tended to undershoot the rest of the year because of seasonal adjustment issues related to how the BEA factors in unusual changes in economic activity. For example, the BEA adjusts for the fact that people tend to spend more around the holidays, and so higher consumption in that season doesn’t reflect an underlying shift in the economy’s health.
The first quarter marked the first time in four quarters that GDP didn’t come close to or exceed President Donald Trump’s 3% target. It was also the first comprehensive reading on the economy since the Tax Cuts and Jobs Act went into effect.
Although the full impact of tax cuts and higher government spending hasn’t yet materialized, many economists have said the administration’s 3% target is unsustainable. That is partly because productivity growth has slowed over the years.
First-quarter GDP will be revised two more times over the next two months as the BEA gathers more complete data.
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