WASHINGTON (Reuters) – U.S. economic growth slowed slightly more than initially thought in the first quarter as consumer spending rose at its weakest pace in nearly five years, but activity is already picking up against the backdrop of a tightening labor market and tax cuts.
Gross domestic product increased at a 2.2 percent annual rate, the Commerce Department said on Wednesday in its second estimate of first-quarter GDP, instead of the previously reported 2.3 percent pace. While business spending was stronger than initially estimated, inventory investment was far smaller than the government reported last month.
The economy grew at a 2.9 percent rate in the fourth quarter. Economists expect a $1.5 trillion income tax cut package, which came into effect in January, will spur faster economic growth this year and lift annual GDP growth close to the Trump administration’s 3 percent target.
Growth is also expected to get a boost from increased government spending. April data including retail sales, trade and industrial production suggest the economy regained speed early in the second quarter. Growth estimates for the second quarter are above a 3 percent rate.
Economists had expected first-quarter GDP growth would be unrevised at a 2.3 percent pace.
“Growth is set to rev up soon given the deficit-financed tax cuts and a big increase in federal government spending,” said Scott Hoyt, a senior economist at Moody’s Analytics in West Chester, Pennsylvania.
An alternative measure of economic growth, gross domestic income (GDI) increased at a 2.8 percent rate in the January-March quarter, the fastest since the third quarter of 2016. GDI rose at a 1.0 percent pace in the fourth quarter.
The average of GDP and GDI, also referred to as gross domestic output and considered a better measure of economic activity, increased at a 2.5 percent rate in the first quarter. That followed a 2.0 percent rate of growth in the prior period.
The income side of the growth ledger was boosted by after-tax corporate profits, which surged at a 5.9 percent rate last quarter after rising at a 1.7 percent pace in the fourth quarter. The government slashed the corporate tax rate to 21 percent from 35 percent effective January.
Wages and salaries also got a lift from lower tax rates, increasing $119.5 billion in the first quarter, an upward revision of $3.1 billion from earlier estimates.
STRONG LABOR MARKET
Separately, the ADP national employment report on Wednesday showed private sector payrolls increased by 178,000 jobs in May after rising 163,000 in April. The data was released ahead of the government’s more comprehensive employment report on Friday.
According to a Reuters survey of economists, nonfarm payrolls likely increased by 188,000 jobs this month after gaining 164,000 in April. The unemployment rate is forecast unchanged at a near 17-1/2-year low of 3.9 percent.
“Job growth is still strong for this stage of the expansion but slowing as businesses are having a difficult time finding qualified workers to fill open positions,” said Scott Anderson, chief economist at Bank of the West in San Francisco.
Steady growth and a robust labor market are seen encouraging the Federal Reserve to raise interest rates next month. The U.S. central bank increased borrowing costs in March and forecast at least two more rate hikes for this year.
U.S. financial markets were little moved by the data as investors keep a wary eye on political developments in Italy. The dollar fell against a basket of currencies and prices for U.S. Treasuries were trading lower. Stocks on Wall Street rose.
Growth in consumer spending, which accounts for more than two-thirds of U.S. economic activity, braked to a 1.0 percent rate in the first quarter, rather than the previously reported 1.1 percent pace. It was the slowest pace since the second quarter of 2013 and followed the fourth quarter’s robust 4.0 percent rate.
Businesses accumulated inventories at a $20.2 billion rate, instead of the $33.1 billion pace estimated last month. Inventory investment contributed 0.13 percentage point to GDP growth instead of 0.43 percentage point. The smaller inventory build bodes well for second-quarter GDP growth.
The trade deficit in the first three months of the year was a bit bigger than initially thought and had no impact on the GDP growth rate. Trade was previously estimated to have added 0.20 percentage point to output.
It could contribute to GDP growth in the second quarter as another report from the Commerce Department showed the goods trade deficit falling 0.6 percent to $68.2 billion in April.
Business spending on equipment was revised up to a 5.5 percent growth rate in the January-March quarter from the 4.7 percent pace estimated last month. That was still a moderation in investment following double-digit growth in the second half of 2017. April durable goods data suggested business spending on equipment is likely to slow further in the second quarter.
Investment in homebuilding fell at a 2.0 percent rate in the first quarter instead of being unchanged as reported last month.
Reporting by Lucia Mutikani; Editing by Andrea Ricci