WASHINGTON (Reuters) - U.S. economic growth accelerated in the first quarter, the government confirmed on Thursday, but the export and inventory boost to activity masked weakness in domestic demand, some of which appears to have prevailed in the current quarter.
Gross domestic product increased at a 3.1% annualized rate, also driven by strong defense spending, the government said in its third reading of first-quarter GDP. That was unchanged from its estimate last month. The economy grew at a 2.2% pace in the October-December period.
Despite the unchanged reading, growth in consumer spending was revised lower and business investment in intellectual property products was stronger than previously estimated. There were also upward revisions to spending on nonresidential structures. Revisions to the trade deficit and inventory accumulation were minor.
Economists polled by Reuters had expected first-quarter GDP growth would be unrevised at a 3.1% rate.
Excluding trade, inventories and government spending, the economy grew at only a 1.3% rate in the first quarter. That was the slowest rise in this measure of domestic demand since the second quarter of 2013.
When measured from the income side, the economy grew at a tepid 1.0% rate in the last quarter. Gross domestic income (GDI) was previously reported to have increased at a rate of 1.4% in the first 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 2.1% rate in the January-March period, down from the 2.2% growth pace estimated last month.
Federal Reserve Chairman Jerome Powell last week acknowledged the temporary boost to economic growth from trade and inventories, which he described as “components that are not generally reliable indicators of ongoing momentum.”
The U.S. central bank last week signaled interest rate cuts as early as July, citing rising risks to the economy, especially from an escalation in the trade conflict between the United States and China, and low inflation.
The economy will mark 10 years of expansion in July, the longest on record. But momentum is slowing, with manufacturing struggling, the trade deficit widening again and the housing sector still mired in a soft patch.
While consumer spending appears to have regained speed in the second quarter, business spending on equipment is expected to have contracted further following Wednesday’s weak report on durable goods orders in May. The trade war between Washington and Beijing is hurting both business and consumer confidence.
The Atlanta Fed is forecasting GDP growth to rise at a 1.9% annualized rate in the April-June quarter.
The trade deficit narrowed to $905.0 billion in the first quarter, instead of $903.6 billion as reported last month. The trade gap contributed 0.94 percentage point to GDP rather than the 0.96 percentage point estimated last month.
The U.S.-China trade tensions have caused wild swings in the trade deficit, with exporters and importers trying to stay ahead of the tariff fight between the two economic giants. The standoff has also had an impact on inventories. Growth in inventories was revised down to a $122.8 billion rate in the first quarter from the previously estimated $125.5 billion pace.
Part of the inventory build was because of weak demand. Inventories contributed 0.55 percentage point to first-quarter GDP, rather than the 0.60 percentage point reported last month.
Growth in consumer spending, which accounts for more than two-thirds of U.S. economic activity, was revised down to a 0.9% rate, the weakest in a year. Consumer spending was previously reported to have increased at a 1.3% pace in the first quarter.
Business spending on equipment declined at an unrevised rate of 1.0% rate, the weakest since the first quarter of 2016. Government investment increased at a 2.8% rate. It was previously reported to have risen at a 2.5% rate.
The government also reported on Thursday after-tax profits without inventory valuation and capital consumption adjustment, which correspond to S&P 500 profits, fell at a 0.2% rate in the first quarter. Profits were previously reported to have dropped at a 0.8% pace.
Reporting by Lucia Mutikani Editing by Paul Simao Lucia.Mutikani@thomsonreuters.com; 1 202 898 8315; Reuters Messaging: firstname.lastname@example.org