October 22, 2020

A Weak Consumer Weighed on Growth in the First Quarter

The economy grew at an annual 1.8 percent rate in the first three months of this year, the Commerce Department said on Thursday, unchanged from an earlier estimate and weaker than most forecasts.

A separate report from the Labor Department showed the number of Americans claiming unemployment benefits unexpectedly rose last week by 10,000, to 424,000.

Some of the slowdown in growth was linked to bad weather in early 2011 and an 11.7 percent decline in defense spending.

Economists were cautious about forecasting a rebound in the second quarter, citing the rise in jobless claims and a moderation in factory output, which has been hit by disruptions to supply chains after the March earthquake in Japan.

“The second-quarter rebound is likely to be muted,” said Nigel Gault, chief United States economist at IHS Global Insight in Lexington, Mass.

The economy expanded at a 3.1 percent rate in the October-December period. Economists had expected the first-quarter pace to be revised up to 2.1 percent.

The economy has expanded for seven straight quarters, but growth has been tepid by historical standards, leaving both the Obama administration and opposition Republicans scrambling for ideas to put it on a faster track.

Consumer spending, which accounts for more than two-thirds of the nation’s economic activity, expanded at a 2.2 percent rate in the first three months of this year, slower than the previously reported 2.7 percent.

After rising at a 4 percent clip in the fourth quarter, spending in the first quarter was slowed by high food and gasoline prices, which pushed inflation to its fastest pace in two and a half years.

The personal consumption expenditures price index rose at an unrevised 3.8 percent rate in the first quarter. That compared with the fourth quarter’s 1.7 percent increase. The core index, which is closely watched by the Federal Reserve, advanced at a 1.4 percent rate, the quickest rate since the fourth quarter of 2009.

Fed officials would like to see this measure close to 2 percent. The lower rate suggests that the central bank will be in no hurry to raise interest rates once it concludes its $600 billion, government bond-buying program in June, analysts said.

“This may put off the day where the Fed starts normalizing interest rates until even further down the road,” said Chris Rupkey, chief financial economist at the Bank of Tokyo-Mitsubishi UFJ in New York. “The Fed is going to want to see G.D.P. above 3 percent certainly before taking their foot off the gas.”

Although consumer spending pulled back in the first quarter, economists hope a recent drop in gas and food prices will ease the pressure on household budgets.

The soft consumer spending overshadowed a $52.2 billion increase in business inventories, which was well above the initially reported $43.8 billion rise.

But a decline in vehicle production so far in this quarter because of shortages of parts from Japan could cause a drawdown in inventories and weigh on growth in the April-June period.

Motor vehicle output added 1.28 percentage points to first-quarter G.D.P.

The G.D.P. report also showed after-tax corporate profit fell at a rate of 0.9 percent in the first-quarter after rising at a 3.3 percent pace in the fourth quarter.

The drop in profit, the first since the fourth quarter of 2008, likely reflected a slowdown in productivity growth as businesses stepped up hiring. Economists had expected corporate profit to grow at a 2.3 percent pace.

Article source: http://feeds.nytimes.com/click.phdo?i=2d3b8a334d595c01e06cc24e04a2289d

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