United States economy slows in first quarter as consumer spending brakes sharply

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The government's first estimate of economic growth at the beginning of 2018 was better than expected: GDP increased at a 2.3 percent annual rate in the first quarter, the Commerce Department said Friday - above Wall Street estimates of 2 percent.

Government spending grew at a 1.2 percent rate, down from a gain of 3 percent in the fourth quarter, as spending by state and local governments slowed. They expect a bounce back in the coming months, and preliminary estimates point to 3.6% growth in the second quarter.

Households also boosted savings, which bodes well for a pickup in spending. First-time claims for unemployment insurance fell to 209,000 in the week through April 21, the lowest level since 1969. The year over year rate of Inflation edged up to 1.8% from 1.7%.

Other indicators gave a mixed view of the economy.

The increase in first-quarter real GDP reflected positive contributions in several areas, including exports, private inventory investment and government spending, according to the report. However, the difference between consumer and business behavior suggests that the bill's economic benefits may take longer to get down to consumers than Republicans can wait in this midterm cycle.

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Economists had expected some moderation in consumer spending after last year's bumper holiday spending season. Inflation, as measured by the PCE price index rose at a 2.7% annual rate in the first quarter.

On the global front, net exports swung back to be a positive contributor in the first quarter, adding 0.20 percentage points, after subtracting 1.16 percentage points from GDP in the fourth quarter. The U.S. economy grew at a steady 2 percent rate over the past decade.

Consumer spending, which accounts for more than two-thirds of the economy, eased to 1.1% - the slowest pace since Q2 2013 - after spending grew by 4% in the previous quarter.

GDP in the United Kingdom grew by just 0.1% for the first quarter as uncertainty over the UK's exit from the European Union next year crimped business investment and weighed on construction. The labor market is near full employment and both business and consumer confidence are strong.

The first-quarter figures showed household consumption added 0.73 percentage point to GDP growth, following 2.75 points in the prior quarter that representing a 4 percent annualized gain.

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Economists say statistical quirks, or so-called residual seasonality, have been behind some of the disappointing first-quarter GDP results in recent years. That was offset somewhat by gains in inventory building by businesses and a lower trade deficit.

The latest Commerce report was the first since President Trump's tax cuts, including a reduction in corporate taxes created to boost investments and jobs, took effect on January 1.

In a separate report in Friday, the Labor Department said wages and salaries shot up 0.9 percent in the first quarter. "I think the fundamentals for consumer spending growth in the rest of 2018 are very good".

Jason Furman, senior fellow at the Peterson Institute for International Economics, tweeted that although the numbers were likely to be revised higher, he was modestly concerned by the numbers because "the underlying Q1 number is weaker than the headline".

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