GDP Report: US economy posts strong first quarter, but consumer spending slows


But delving into the details of the report reveals that the weakness remains in the US economy.

The Bureau of Economic Analysis reported that gross domestic product grew at an annual rate of 3.2%, substantially above the projected 2.1%, driven by higher spending by the state and local government, lower imports and business inventories.

The rate is a first estimate, and can be revised as more information arrives in the coming weeks. It would have been even stronger, concluded the BEA, without the government's closure, which subtracted 0.3 percentage points from the growth in the first quarter rate. Federal spending was flat, since an increase in military spending was offset by a decrease in non-defense spending.

The contribution of state and local government spending was mainly due to the construction of roads and highways, which the localities have badumed while awaiting a package of infrastructure from the federal government.

The underlying components in the report, however, suggest that a widely anticipated slowdown is still underway.

Growth was driven in part by higher inventories, especially in the manufacturing industry, which may indicate that companies are storing goods instead of selling them. Domestic private sales, which subtract imports and exports, as well as government spending, slowed to half the rate of the previous quarter, the smallest gain in three years.

Meanwhile, consumer spending slowed down, in part due to weak sales of goods, particularly light trucks. Business investment also slowed down compared to the previous quarter, as agricultural machinery and office furniture registered the greatest decreases. The biggest boost for business investment came from intellectual property products.

"By eliminating the large-scale increases in net trade, inventories and investment in highways, which will revert in the coming quarters, the growth was only about 1%," wrote Paul Ashworth, chief economist at the research firm. Captal Economics. "Under those circumstances, we continue to expect overall growth to slow down this year, forcing the Fed to begin cutting interest rates before the end of the year."

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