US economy defies slowdown fears with 3.2% first-quarter growth
Soft inflation figure prompts negative market reaction despite strong headline number
The US economy defied fears of a first-quarter slowdown, overcoming a prolonged government shutdown, trade tensions and global economic uncertainty to deliver growth that trounced analysts' expectations.
Gross domestic product rose at an annualised pace of 3.2 per cent during the first three months of the year, an initial reading from the commerce department showed on Friday, handily topping Wall Street predictions for 2.3 per cent growth. It is also a leg up from the 2.2 per cent pace of expansion recorded during the fourth quarter.
The robust reading is a boost for economies around the world after a growth scare earlier this year triggered a rally in the bond market. It was also quickly seized upon by Republicans who are anxiously watching the economy as they prepare for next year's elections. The data quelled previous fears that the US is running into an imminent recession, and leaves the economy on track to hit its longest-ever expansion later this year.
But beneath the impressive headline growth figure, some of the underlying detail in the report was less buoyant. Consumer spending slowed from the fourth quarter and growth relied heavily on a build-up in inventories, which could reverse later this year. The report will further complicate the policy deliberations at the Federal Reserve, which is weighing firm headline growth and a resilient labour market against perplexingly soft inflation as it considers whether the next move in rates should be down rather than up.
"The headline figure is great, but it doesn't reflect particularly strong demand and it is being goosed by other factors," said Megan Greene, chief economist at Manulife Asset Management. "The consumer is not in trouble — but they are not knocking it out of the park either."
Investors focused on the softer underlying data, sending US equities lower in early trading in New York and causing bonds to rally. Equities recovered later in the day — the S&P 500 index closed up 0.5 per cent — but the benchmark 10-year treasury yield remained 3 basis points lower at 2.5 per cent.
The weaker than expected inflation data cemented forecasts that the Fed will pause interest rate increases this year and raised investor expectations that the central bank could cut rates. Futures markets are pricing in in a 66 per cent chance that the Fed will cut rates before the end of the year, up from 61 per cent on Thursday.
"Yes, GDP looks strong on a headline basis but the details are much weaker, particularly in personal consumption and the disappointing inflation," said Jon Hill, an interest rate analyst at BMO Capital Markets "So much of the Fed policy path is going to be guided by inflation."
The world's most important economy had appeared poised for a sharp slowdown at the beginning of the year, with a run of weak economic reports suggesting first-quarter GDP growth could be as low as 0.2 per cent. Fears of a recession were heightened by a brief inversion of the US yield curve, while uncertainty over the direction of the global economy prompted the Federal Reserve to scrap plans to increase interest rates this year.
Since then, improving economic data, more dovish central banks and signs of progress on US-China trade talks have helped restored the confidence of consumers and investors. Just this week, both the S&P 500 and the Nasdaq Composite both re-entered record territory.
The Trump administration expressed delight at the GDP report, arguing that the US economy was defying sceptics who predicted a slowdown. "This blockbuster GDP report shows that President Donald J Trump's policies are unleashing the vitality of the American economy, fulfilling the President's promise for 3 per cent economic growth and benefiting American workers in the form of better jobs and higher wages," said Wilbur Ross, commerce secretary.
Yet improving global prospects have not put an end to talk that the Fed's next move could be a rate cut given stubbornly weak inflation and signs of underlying weakness in the US economy. Consumer spending grew at 1.2 per cent in the first quarter, according to Friday's numbers, a sharp slowdown from the 2.5 per cent pace in the final three months of 2018.
Real final sales to private domestic purchasers, which is a gauge of private domestic demand, rose a moderate 1.3 per cent in the first quarter, after increasing 2.6 per cent in the fourth. "The composition of growth revealed that the economy is undeniably cooling," said Lydia Boussour, US economist at Oxford Economics.
At the same time, more than half the growth in GDP was driven by trade and inventories. This was offset by the consumer deceleration, as well as a slowdown in non-residential fixed investment, which grew 2.7 per cent, down from 5.4 per cent previously. Residential investment shrank for the fifth straight quarter.
"Taken together, today's report looks better than it really is," said Harm Bandholz, an economist at UniCredit in New York, in a note. "The improvement in net exports is not going to last, and the renewed surge in inventories (it is now the third straight quarter in which inventories have risen at a rapid pace) will soon be reversed. When it happens, this will become a major drag on growth.!
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