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U.S. economy grew at sluggish 0.7 percent in first quarter of 2017

The U.S. economy posted its weakest first quarter growth in three years as consumers crimped on spending. (Video: Reuters)

The U.S. economy expanded at its slowest pace in three years in the first quarter of this year, according to government data issued Friday morning, as spending by consumers grew at a slower pace and government outlays fell.

America’s gross domestic product, a broad measure of economic growth, grew at an annualized rate of just 0.7 percent in the first three months of 2017, a significant slowdown from the previous quarter that economists say is more likely due to measurement error than to Donald Trump’s performance as president.

Most economists had been expecting lackluster growth. Yet the report still highlights the challenge this administration — which marks Trump's first 100 days in office on Saturday — will face trying to meet its target rate of 3 percent economic growth.

A rapid pace of economic expansion is crucial for Trump's broader economic agenda. He plans to aggressively reduce taxes, which could leave the federal government short trillions of dollars in revenue unless the budget is bolstered by strong economic growth.

Mark Zandi, chief economist at Moody’s Analytics, said he didn’t think slower first-quarter growth reflected on Donald Trump’s presidency.

“It’s too early for that. I do think though it highlights how difficult it will be to raise growth on a sustained basis. It will take some really good policy to do that, and I haven’t heard that from the administration, at least not yet,” he said. 

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Friday's data showed consumer spending expanding in the quarter, though it grew at just 0.3 percent, the slowest pace since 2009. Reduced spending at all levels of government, as well as a strong dollar that weighed on exports and increased imports, brought down the official estimate. Trump has said that closing the gap between imports and exports is one of his chief priorities.

Markets opened on a slide Friday. The Standard & Poor's 500 index had fallen 0.05 percent and the Dow Jones industrial average was down 0.1 percent by mid-morning.

Leslie Preston, a senior economist at TD Economics, said she didn't see the new data as cause for alarm. “There were a lot of temporary factors that were hurting growth in the first quarter,” she said.

One was unseasonably warm weather in many parts of the country in January and February. While warmer temperatures gave a boost to the construction industry, it cut down significantly on the amount of energy people used to heat their homes and cars, weighing on consumer spending.

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Auto sales were also weak in the first quarter, but Preston says that isn’t too much of a cause for concern. “Sales have just been so strong in recent quarters, we were due for a bit of a breather,” she says.

One bright spot was a rebound in business investment, driven by the construction of new oil rigs. Oil prices have gradually ticked up over the past year from the ultra-low levels seen in early 2016, making new investments economical once again.

The report contains the first official estimates of economic growth under Trump and was coincidentally released on the 99th day of his new administration. The president and his aides have tried to show demonstrable progress on his chief priorities, including economic issues, before he concludes his first 100 days in office.

The weaker growth is partly due to persistent measurement issues, which have caused the government to underestimate growth in the first quarter for many years — and reflected poorly on other presidents in their first quarter in office.

Diane Swonk, a Chicago-based economist, said that measurement errors alone probably shaved around three-quarters of a percent off the growth estimate in the first quarter. Adding that back in, growth would be similar to what the country has seen in previous quarters.

In the fourth quarter of 2016 the final full quarter of President Barack Obama's tenure, the economy grew by 2.1 percent, federal economists reported last month.

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Most economists expect the pace of growth to rebound in the second quarter. All the same, the disappointing figure suggests a potentially worrisome gap between expectations for the new administration and the reality of how the economy is performing.

Surveys show that consumer and business confidence have soared since the November election, creating one of the biggest divergences in recent memory between soft data — measurements of how people feel about the economy and their future — and the hard data that government statisticians release each month.

Hard data has painted a more mixed picture. In the first two months of the year, the number of jobs added to the U.S. economy surpassed expectations. But the number of new jobs created slumped in March, partly due to a snowstorm that prevented some Americans from working.

"It’s too soon for the president to take credit for the good employment numbers, and too soon for him to take the blame for the shortfall in GDP," said Swonk. "The important issue is whether the expectations and euphoria we saw following the election will come to fruition. I think there’s been a lot more skepticism on that lately."

The data is unlikely to dissuade the Federal Reserve from continuing with its plan to hike interest rates two more times this year, after already raising rates at its March meeting.

Zandi said the Fed is likely to pay the most attention not to the GDP figure but a measure of wages contained in Friday's data release. That measure showed an encouraging increase in the first quarter that suggests the economy is likely robust enough to sustain further increases in the interest rate.

Investors saw a 95 percent probability that the Fed would not increase rates when it next meets next week, but a 63 percent probability of an increase in June, Fed futures contracts monitored by CME Group showed on Friday.