First quarter GDP shows sharp slowdown in economic growth

FTSE to add around five points early

Friday's gross domestic product report didn't look good. U.S. GDP grew at a revised 2.1 percent rate in the fourth quarter of 2016, 3.5 percent in the third quarter, a 1.4 percent in the second quarter, and 0.8 percent rate in the first quarter.

Also dragging on the economy was the value of new inventories, which increased by only $10.3 billion in the first quarter, down from an increase of about $50 billion at the end of a year ago.

The labor market now is close to full employment and the confidence of consumers is close to highs of multi-years, which suggests that the sharp slowdown mostly created by weather in spending by consumers is likely to be short-lived.

Net exports contributed 0.07 percentage point to the growth in the quarter, compared to a subtraction of 1.82 percentage points in the previous quarter.

This residual seasonality means it would be a mistake to reach a conclusion about what the first-quarter report means for the rest of the year. The 9.4 percent increase was more than 10 times the previous quarter's number and the best since the fourth quarter of 2013.

The result fell far short of US President Donald Trump's ambitious growth targets and underscores the challenges of accelerating economic expansion.

Trump has targeted spending on infrastructure, cuts in taxes and deregulation as a way to achieve the goal of faster growth of the economy. And, for the same Trump's administration has proposed plan for deducting the corporate income tax rate from 35% to 15%.

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Economists estimate that growth in consumer spending, which accounts for more than two-thirds of US economic activity, braked to below a 1.0 percent rate in the first quarter. My current forecast is for 2.8 percent growth in real GDP in the second quarter, with the economy expanding 2.1 percent for 2017 as a whole.

The weakness in consumer spending is blamed on a mild winter, which undermined demand for heating and utilities production. Higher inflation, which saw the consumer price index averaging 2.5 percent in the first quarter, also hurt spending.

Government delays issuing income tax refunds to combat fraud also curbed consumer spending.

"We expect growth to decelerate and the engines of growth to rebalance - with higher contributions from manufacturing and net exports, and less thrust from services and private and public consumption", Goldman Sachs chief Latin America economist Alberto Ramos said in a note. The Federal Reserve, in fact, has begun raising interest rates to ensure that the tight job market doesn't trigger high inflation pressures. In those years, real GDP declined by 8.5 percent, 6.4 percent, 12.9 percent and 1.3 percent.

Trump repeatedly attacked the weak GDP rates during the campaign as an example of the Obama administration's failed economic policies. JPMorgan is forecasting inventories chopping off one percentage point from GDP growth.

However, a decline in consumption spending is unlikely to take hold. Moreover, consumers did not spend the services savings, as goods spending was essentially unchanged on the quarter.

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