U.S. Economy Grew at 3.2% Rate in First Quarter

on Apr26
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Rumors of the economic expansion’s death appear to have been greatly exaggerated.

Gross domestic product, the broadest measure of goods and services produced in the economy, rose at a 3.2 percent annual rate in the first three months of the year, the Commerce Department said Friday. That is significantly better than most economists expected, and far better than the dour forecasts of early this year, when many forecast a near stall in growth. (Friday’s figures are preliminary and will be revised at least twice in the months ahead.)

Economists warned that the report was inflated by short-term factors and probably overstated the underlying pace of growth. Most anticipate a downshift as the year progresses, and hardly any independent economists expect that President Trump will be able to deliver the 3 percent growth he has promised this year.

Still, after a rough winter, the economy appears to have entered the spring fundamentally intact. Stock-market turmoil, a partial government shutdown and a crippling “polar vortex” failed to bring the decade-long recovery to an end. And with the job market still strong and consumers confident, fears of a recession appear to have been set aside.

“The angst has settled, and the economy has come back,” said Ben Herzon, an economist with Macroeconomic Advisers, a forecasting firm. “I just can’t point to anything now that’s going to push us into recession.”

Economists don’t expect the Fed to take any action at its policy-setting meeting next week, and Friday’s report is unlikely to change that. Ellen Zentner, chief United States economist for Morgan Stanley, said Fed policymakers would recognize that the burst of growth in the first quarter was temporary, and that inflation has actually slowed.

The first-quarter growth figure was inflated by a buildup of inventories and by a steep decline in imports. Both trends are likely to reverse in the second quarter. (Imports count as a negative in G.D.P. accounting, so a decline in imports makes growth look stronger. Exports, which add to G.D.P., rose significantly.)

For a better gauge of the economy’s strength, analysts recommend focusing on a different number, which strips out trade and inventory effects as well as the impact of government spending. That measure, known as final private sales, came in at 1.3 percent, down from 2.6 percent in the fourth quarter of 2018 and the weakest showing since 2013.

Next quarter, the pattern could reverse: Inventories are likely to shrink and imports to grow, pushing down overall G.D.P. growth even if the underlying economy is essentially unchanged.

“Given the backdrop of weak global trade, it would be amazing if net trade were to continue to add to G.D.P. as the year goes on,” said Paul Ashworth, chief United States economist for Capital Economics.

Consumer spending has been the bedrock of the recovery, staying strong even as other sectors have ebbed and flowed. So economists were nervous when spending tumbled unexpectedly in December and failed to rebound in January.

Since then, things have looked better. Consumer confidence, which fell sharply in December and January, quickly recovered once the shutdown ended and financial markets stabilized. Retail sales bounced back strongly in March.

The net result: Consumer spending was weak in the first quarter, rising at just a 1.2 percent rate, the slowest in a year. But the quarter ended on a strong note, and most economists see little reason to worry looking ahead.

“We did see strengthening throughout the quarter with momentum building,” said Ms. Zentner said. “We’ve got nice consumer spending momentum going into the second quarter.”

But if consumers were quick to put the winter winds behind them, businesses still seem wary. Business investment slowed in the first quarter, and the miniboom in manufacturing that greeted Mr. Trump’s first two years in office appears to be fading.

“If there’s weakness, it’s in the business-spending data,” said Michael Gapen, chief United States economist for Barclays. “It has yet to rebound in a meaningful way following the end of the government shutdown.”

Worthington Industries, an Ohio-based metals manufacturer, has been hit by Mr. Trump’s steel tariffs, which have driven up costs and led some customers to delay orders. But those effects have been offset by a strong underlying economy, which has kept demand high and made it easier for the company to pass on costs to customers.

“My belief is that the economy is very strong right now, and that a little price inflation is really not going to dampen demand that much,” said Andy Rose, Worthington’s president.

Still, a slowdown in China has sapped what had been a major source of growth for American exporters in recent years. And while American consumers are doing well, their spending isn’t rising fast enough to fill the gap. That means companies are looking for other ways to improve profitability, including cutting costs.

“Cost cutting certainly is a late-cycle exercise,” Mr. Rose said. “Labor costs are going up. You have no choice but to try to save costs where you can.”

That caution may reflect nervousness about how long the economic expansion, already among the longest on record, can last. But while economists say another recession is inevitable eventually, they see little evidence that one is on the horizon.

Economists do expect growth to slow this year, as the effects of tax cuts and government spending increases fade. But they are less nervous than a few months ago, when markets were in turmoil, trade tensions were flaring up and the Federal Reserve seemed uncertain about which way to turn.

“We had a near miss on a recession, but we didn’t have one last year,” said Joe Brusuelas, chief economist for RSM, a financial consulting firm. “We won’t have one this year. I think this is a good place for the economy to be.”

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