U.S. Consumer Spending Weakened In The First Quarter Of This Year, But The Economy Remains Strong

The U.S. economy slowed substantially in the first quarter compared to the previous nine months when the economy posted much more rapid growth. The economy expanded at an annual rate of 2.3% in Q1, compared to an average of 3.1% growth over the previous three quarters.

However, the Q1 weakening is expected to be only temporary. Economic growth is expected to improve in the second quarter for variety of reasons, including the economic boost from the Administration’s $1.5 trillion income tax cut package and the recent surge of wages in the very tight labor market.

The data indicate that the American economy slowed in Q1 primarily because consumer spending, which accounts for about 70% of GDP, decelerated to its weakest pace in nearly five years. Consumer spending slowed in the first quarter to a 1.1% annual growth compared with the 4% expansion in the previous quarter.

An increase in the personal saving rate rose in the first quarter accounted for the bulk of the slowdown in consumer spending. The percentage of disposable personal income which was saved increased to 3.1% in Q1, compared with 2.6% in the fourth quarter.

As well, the first quarter GDP figures are only an advance estimate based on incomplete information and are therefore subject to revision. Indeed, the average plus or minus revision from the first advance GDP growth estimate to the second estimate is roughly 0.5 percentage points.

Moreover, first quarter GDP estimates often seem to understate the U.S. growth rate. That is, the U.S. economy tends to be unusually sluggish in the first quarter because of a seasonal adjustment quirks in the data.

Also, the fact that inventory accumulation rose in the first quarter and that the foreign trade deficit narrowed both suggest a stronger economy in future quarters.

Finally, the GDP price deflator, the broadest index of inflation, rose at a 2% annual rate in the first quarter after increasing 2.3% in the fourth quarter.

Personal Consumption Weakened In Q1

Q1 Slowing Was An Aberration

The American economy slowed substantially in the first quarter of 2018 compared to the previous nine months of much more rapid growth.

The economy expanded at an annual rate of 2.3% in Q1, compared to an average of 3.1% growth over the previous three quarters. However, the economic slowdown in the first quarter (based on advanced estimates) is likely not the pattern which will emerge over the balance of 2018.

As the attribution data in the following chart illustrates, much of the deceleration in the first quarter growth was due to slower consumer spending, which accounted for only 0.7 percentage points of GDP growth compared to a 2.8 pp contribution in the previous quarter.

Moreover, the second chart below indicates that American consumers are quite optimistic, since unemployment is very low, and the economy is continuing to expand in what appears to be a stable pace.

The Pattern Of U.S. GDP Growth, The Last Twelve Months

Federal Reserve Bank Of Dallas, U.S. Economic Update, May 8, 2008