First Quarter U.S. Economic Growth Disappoints

The Commerce Department reported that the U.S. economy expanded at an annual rate of 2.2 percent in the first quarter, below the consensus estimate of 2.5 percent, in the first of three readings for the period. Consumer spending in general and auto sales in particular made the largest contributions to the overall gain as inventories and residential investment were also positive, offsetting declining government spending.

With a contribution of 2.04 percentage points to the headline figure, personal spending accounted for nearly all of overall gains for the quarter. Durable goods sales contributed 1.13 percentage points, paced by motor vehicle and auto parts sales that were responsible for 0.68 percentage points, while food services and financial services were the bulk of the 0.57 percentage point contribution from the services component.

Private domestic investment accounted for 0.77 percentage points, just over half of this coming from homebuilders, and growing inventories were responsible for 0.59 percentage points. Imports and exports were about equal and, as a result, had virtually no impact on the headline number, however, government spending declined for the sixth quarter in a row, subtracting 0.60 percentage points from the 2.2 percent overall growth rate, primarily due to cutbacks at the federal government level.

Given that the combination of an unusually warm, dry winter and upward seasonal adjustments during the January-to-March period were important factors behind the surge in homebuilding and higher levels of consumer spending, this report is actually much weaker than it appears.