Economy grew at 3.2% in first quarter

Economy grew at 3.2% in first quarter, beating expectations

The economy grew at a 3.2% annual rate in the first quarter, the Bureau of Economic Analysis reported Friday morning, easily beating forecasters’ expectations.

The healthy growth rate in gross domestic product also improved on the 2.2% rate seen in the fourth quarter of 2018, despite several economic headwinds in the first quarter of this year, such as the partial government shutdown and a slowdown in the global economy. The bureau said that the pick-up in growth was driven by stronger state and local government spending and exports.

President Trump has promised sustained 3% annual GDP growth, a promise that was narrowly fulfilled in 2018 — depending on how you measure GDP.

Friday’s report, however, contained hints that underlying growth is not as strong as the 3.2% headline rate would suggest. For example, about 0.65 percentage points of the growth rate were attributable to strong business purchases of inventories, which are not indicative of future growth. A slowdown in imports — another factor that won’t boost growth — also contributed to the higher growth rate.

And business investment, the factor that the Trump administration has hoped would be strengthened by lower tax rates, grew at a 2.6% rate in the first quarter, half the pace of the previous quarter.

Economists at the Federal Reserve and on Wall Street generally expect growth to slow in 2019, and then to decline even more in the years ahead as labor force growth diminishes.

Trump administration economists have said that their goal is to bring more workers into the labor force as the long economic expansion unfolds. In the meantime, Trump has enacted tax cuts, meant to spur business investment, and spending increases, which boost GDP in the short term. Democrats have argued that the tax cuts aren’t generating the kind of long-term investment Republicans promised.

Taken altogether, Friday’s GDP report will probably reassure officials at the Federal Reserve that they are right to be cautious about raising interest rates. The Fed has backed off plans to raise its interest rate target this year in light of the fact that inflation has failed to meet or exceed its 2% target.

Nevertheless, Friday’s report indicates that the economy remains in solid shape going on 10 years since the end of the recession. “The economic expansion will set new records for longevity in July and it looks like there is no stopping this economy,” MUFG chief financial economist Chris Rupkey said in a note on the report.

At 3.8%, unemployment is historically low, and the very low recent levels of claims for unemployment insurance suggest that unemployment is not likely to rise in the near future. Wage growth has improved in recent months. And consumer confidence remains high.

The first-quarter GDP figures are a preliminary estimate and are subject to revision in future months.


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