US economy grows only 0.5% in first quarter

World’s largest economy grows at slowest pace in two years, signalling a weakening outlook for all sectors except the housing market.

Photo by: Reuters
Photo by: Reuters

A US flag stuck in the broken window of a building on the grounds of the now-closed Bethlehem Steel mill in Bethlehem, Pennsylvania, US, April 21, 2016.

US economic growth braked sharply to its slowest pace in two years as consumer spending softened and a strong dollar continued to undercut exports, but a pickup in activity is anticipated given a buoyant labor market.

Gross domestic product increased at a 0.5 percent annual rate, the slowest since the first quarter of 2014, the Labor Department said on Thursday in its advance estimate, also as businesses doubled down on efforts to reduce unwanted merchandise clogging up warehouses.

The economy was also blindsided by cheap oil, which has hurt the profits of oil field companies like Schlumberger and Halliburton, resulting in business spending contracting at its fastest pace since the second quarter of 2009, when the recession was ending.

Economists polled by Reuters had forecast the economy expanding at a 0.7 percent rate in the first quarter. The economy grew at a 1.4 percent pace in the fourth quarter.

Almost all sectors of the economy weakened in the first quarter, with the housing market the lone star.

The slowdown in growth is likely temporary, given a fairly robust jobs market. Applications for unemployment benefits are near a 43-year low and employment gains averaged 209,000 jobs per month in the first quarter.

In addition the Institute for Supply Management's manufacturing and nonmanufacturing surveys, which are closely correlated to economic activity, have rebounded in recent months.

While the Federal Reserve on Wednesday acknowledged economic activity had "slowed," it also said labor market conditions had "improved further." The US central bank appeared to view the threats from the global economy and financial markets as having diminished.

The Fed left its benchmark overnight interest rate unchanged and suggested it was in no hurry to tighten monetary policy further. It hiked rates in December for the first time in nearly a decade.

Economists also say the model used by the government to strip out seasonal patterns from data is not fully accomplishing its goal despite recent steps to address the problem.

Residual seasonality has plagued first-quarter GDP, with growth underperforming in five of the last six years since the recovery started in June 2009.

Consumer spending, which accounts for more than two-thirds of US economic activity, increased at a rate of 1.9 percent. That was the slowest since the first quarter of 2015 and was a deceleration from the fourth quarter's rate of 2.4 percent.

TRTWorld, Reuters