The Economy

U.S. Economy Slows to 2.3% Growth Rate in Q1

Economists expect the GOP tax cuts to give a boost to GDP in Q2 but the economy may still fall short of President Trump's 3% target this year.
Matthew HellerApril 30, 2018

U.S. economic growth slowed in the first quarter, fueling doubts that growth for the full year will reach President Donald Trump’s 3% target even with the impact of the Republican tax cuts.

In its first estimate, the Commerce Department said gross domestic product increased at a 2.3 percent annual rate in the first three months of 2018. That beat economists’ expectations of a 2.0% gain but the economy grew at a 2.9% pace in the fourth quarter.

The slowdown reflected a 1.1% increase in consumer spending, the lowest level in nearly five years after an unusually strong 4% gain in the fourth quarter, as Americans spent $19 billion less on motor vehicles.

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As CNBC reports, “First-quarter GDP tends to be sluggish because of a seasonal quirk. The labor market is near full employment and both business and consumer confidence are strong.”

Economists, moreover, expect growth will accelerate in the second quarter as households start to feel the impact of the tax cuts on their paychecks. Employers adjusted worker paychecks to reflect the lower tax rates in February.

“The full fiscal effect is not yet evident in the data, but we still expect growth of close to 3% by the end of this year,” Chris Rupkey, chief financial economist at MUFG Union Bank in New York, told the Los Angeles Times.

But the Times said the Trump administration “has fallen victim to a problem that afflicted the Obama administration before it — slow first quarters that helped keep annual economic growth below 3%. From 2007 to 2016, first-quarter growth has averaged 1.3 percentage points below growth for the year as a whole, according to a July Federal Reserve study.

“The problem could be that the bump in pay for average workers isn’t as big as supporters of the tax cuts have promised,” the Times suggested, noting that the nonpartisan Tax Policy Center has estimated average annual household income will increase $1,600 this year — and just $930 for middle-income households.

Gus Faucher, chief economist at PNC Financial Services, expects growth to hit 2.8% this year and 2.9% in 2019.