The Bureau of Economic Analysis reported that the U.S. economy grew by an annualized 2.3 percent in the first quarter, according to preliminary data. This was slightly better than the consensus estimate of around 2 percent, even as real GDP eased from 2.9 percent growth in the fourth quarter data. In addition, this was the strongest first quarter reading in three years. Overall, the latest report found healthy growth in nonresidential fixed investment and service-sector spending, with inventory spending and net exports rebounding in the first quarter after being notable drags in the prior release. At the same time, goods spending and the housing market were sluggish, with durable goods spending pulled lower by weak motor vehicle and parts demand.
Since the end of the Great Recession, the U.S. economy has expanded 2.2 percent on average, with 2.3 percent growth in 2017. Moving forward, real GDP should grow by roughly 3 percent in 2018, which would be the strongest growth rate since 2005. Passage of tax reform and other pro-growth measures should help to stimulate economic activity, allowing us to reach that goal.
Along those lines, manufacturers continue to increase capital spending, investment and wages because of tax reform and the changed regulatory environment, and the NAM has highlighted those stories on its “Keeping Our Promise” web page. In my testimony before the Joint Economic Committee earlier this month, I said that tax reform should lead to $55 billion in additional fixed investment in manufacturing this year, with the sector adding at least 100,000 more workers. These data were mostly consistent with that optimism, as business spending was one of the larger bright spots in the first quarter GDP data.
Nonresidential fixed investment rose 6.1 percent at the annual rate in the first quarter, extending the 6.8 percent gain in the fourth quarter. Businesses spent more on structures, up by an annualized 12.3 percent and the best reading in one year, with relatively solid growth for both equipment (up 4.7 percent) and intellectual property products (up 3.6 percent). Nonresidential fixed investment contributed 0.76 percentage points to top-line growth, with positive spending on inventories adding another 0.43 percentage points.
On the international front, net exports swung back to be a positive contributor in the first quarter, adding 0.20 percentage points, after subtracting 1.16 percentage points from GDP in the fourth quarter. Goods exports increased 6.1 percent in the first quarter, which was more than enough to offset the 2.1 percent rise in goods imports.
In contrast to those measures, consumer spending was a weak spot and something that it is hoped will turn around in both revisions and upcoming quarters. Goods spending declined 1.1 percent at the annual rate in the first quarter, pulling back from the 7.8 percent gain in the fourth quarter (the strongest quarterly gain in nearly 12 years). Indeed, this mirrors other data, which have found Americans more skittish about spending in the early months of 2018 in the aftermath of more robust purchasing at year’s end. Indeed, durable goods spending fell by an annualized 3.3 percent in the first quarter, with nondurable goods demand up just 0.1 percent. As a result, goods spending subtracted 0.24 percentage points from real GDP growth for the quarter.
Service-sector spending, on the other hand, rose modestly, up 2.1 percent, adding 0.97 percentage points to headline growth. Americans spent more on financial services and insurance and health care, for instance.
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