The $20 trillion economy turned in a better showing than most recent first quarters, which government reports have struggled to accurately assess because of seasonal issues. Financial market reaction was subdued with both the Dow Jones Industrial Average and the 10-year Treasury closing almost unchanged.
The Commerce Department report was the first since President Trump’s tax cut took effect on January 1. The centerpiece of the tax overhaul was a reduction in corporate taxes aimed at boosting investment and jobs. So far, the results are mixed.
The Commerce Department report showed a robust contribution from business investment, which rose more than 6 percent.
That seemed at odds with Thursday’s Census Bureau report that nondefense capital goods orders, excluding aircraft, fell 0.1 percent in March and that preliminary results from earlier months had been revised lower.
Weakness in the GDP report also was evident in government outlays and consumer spending, which slowed to a 1.1 percent gain from 4 percent in the final quarter of 2017. Slumping auto sales were a major contributor.
“The trend is probably better than what you’re seeing,” said economist Jim O’Sullivan of High-Frequency Economics. “Quarterly data are volatile. You never want to get too caught up in a single number.”
Gains from the tax cut are likely to be stronger in the second quarter as adjusted individual withholding allowances take full effect and tax refunds hit taxpayers’ bank accounts, O’Sullivan said.
Higher federal government spending also will make its mark with O’Sullivan expecting a second-quarter rebound to an annual rate of 3.7 percent.
Commerce Department analysts reported worrying signs of rising prices with a key price index, excluding volatile food and energy costs, rising 2.5 percent. That was the fastest pace since 2011 and it comes as Federal Reserve Chairman Jerome Powell is trying to prevent the economy from growing so fast that it sparks a spiral of rising prices.
The Fed, which wants to keep price increases to about 2 percent annually, raised short-term interest rates in March for the sixth time since 2015 when they were near zero.
“With clear signs that inflation is rising pretty rapidly now, the Fed will need to tighten more aggressively this year and that will lay the seeds for an economic slowdown starting next year,” economist Paul Ashworth of Capital Economics told clients.
Amid signs of labor market buoyancy, the Fed also raised its forecast, predicting the economy would grow this year at an annual rate of 2.7 percent, up from 2.5 percent in December. Employers around the country are reporting difficulty finding skilled workers with the unemployment rate at 4.1 percent and headed lower. First-time claims for unemployment insurance fell to 209,000 in the week through April 21, the lowest level since 1969.
“The Trump administration can stop looking for ways to bring jobs to America because almost everyone out there in the country who has a heartbeat has found employment already,” economist Chris Rupkey of MUFG Union Bank told clients in a research note Thursday.
The economy is steaming ahead despite worries over a potential trade war with China. The Kansas City Federal Reserve Bank manufacturing index rose sharply in April amid optimism about future orders. “Factory activity accelerated in April despite concerns among many firms about changes in international trade policy,” said economist Chad Wilkerson of the Kansas City Fed.
Since the expansion began nearly nine years ago, first-quarter economic growth has averaged just a 1.2 percent annual rate, less than half as fast as the other quarters, according to O’Sullivan of High-Frequency Economics.
Economists say that repeated economic softness in the early months of the year may be due to seasonal adjustment issues with government data. In July, the Bureau of Economic Analysis is scheduled to overhaul its approach to economic scorekeeping for the first time since 2013, in part, to take account of those concerns.