U.S. GDP Growth Slowed on Tepid Consumer Spending -- 2nd Update

The U.S. economy stumbled during the first months of the year, as consumers reined in spending despite a rise in household confidence and a surge in stock prices that greeted the inauguration of President Donald Trump.

Gross domestic product, a broad measure of national output, grew at a 0.7% annual rate in January through March, the slowest pace of expansion in three years, the Commerce Department said Friday. Americans sharply cut back spending on big-ticket items like cars, causing overall consumer purchases to grow at the slowest pace since late 2009.

Major makers of household staples including Procter & Gamble Co. and PepsiCo Inc. this week reported lackluster sales due partly to weak consumer spending. Car maker Ford Motor Co. posted a 35% drop in first-quarter profit. Online retailer Amazon.com Inc. was a bright spot, reporting a jump in profit.

Temporary factors may have suppressed consumer spending in the first quarter. The economy also has a habit of starting the calendar year slowly and then picking up speed in the spring and summer.

The report offered hopeful signs of stronger growth in the coming months, with U.S. companies stepping up investment in long-term projects.

"If you look at the backdrop for spending, including [rising] income, wealth, as well as confidence, I think it's pretty clear the trend in consumer spending has not suddenly collapsed," said Jim O'Sullivan, chief U.S. economist at High Frequency Economics.

Still, the GDP report was a stark reminder that Mr. Trump has set out to reach a daunting goal. The economy has expanded at an anemic annual rate of 2% since 2000 -- including the effects of two recessions. Mr. Trump and his advisers have vowed to boost the growth rate to 3% or more. They are up against long-running headwinds that won't be easily reversed, including an aging population and weak productivity growth.

The latest figures offered the broadest report card on the economy's performance in the first 100 days of the Trump administration. Few presidents have entered office with the kind of expectations facing Mr. Trump. Confidence among consumers and businesses hit multiyear highs and the stock markets hit record levels in the first quarter.

Economists say it is far too early to judge the president's impact on the economy, especially given that he hasn't put in place the main components of his economic plans -- a broad tax overhaul which dramatically reduces corporate tax rates, revamped trade deals and a rollback of environmental, labor, health and other regulations.

"Business and consumer sentiment is strong, but both must be released from the regulatory and tax shackles constraining economic growth," Commerce Secretary Wilbur Ross said in a statement after the GDP report.

Most economists expect growth to rebound to a rate of between 3% and 4% this quarter and then to settle back into its 2% trend in the months ahead.

Sluggish consumer spending drove the first-quarter slowdown, presenting the biggest puzzle of the economy this year. With confidence and stock prices high, gasoline prices modest and jobs and wages increasing, spending ought to be picking up.

Economists have several theories for why that didn't happen. The unusually warm winter led Americans to spend less than usual on heating their homes, meaning less output from big utilities. And delays in many Americans receiving tax refunds from the Internal Revenue Service may have left them with less spending money relative to prior years.

Still, those theories don't entirely explain why consumer spending on durable goods, such as cars and refrigerators, fell by the most in nearly six years.

Concerns are building in the car industry, where a seven-year run in sales growth appears to be petering out. Car sales likely declined for the fourth straight month in April, despite discounts and incentives increasingly pitched by car makers, industry data show.

Strong auto sales have helped boost the economy in recent years.

"Clearly it's a more competitive market that we're dealing in than it was two or three years ago," General Motors Co. finance chief Chuck Stevens told reporters Friday, adding that the "industry is plateauing."

Car dealers were sitting on a 72-day supply of vehicles on average in March, up from 66 days a year earlier, according to researcher WardsAuto.com. Vehicles are piling up despite bigger discounts. Car makers spent an average of $3,499 on incentives per vehicle in the first half of April, the highest level for the month since 2009, according to J.D. Power.

Indeed, a drawdown in inventories across the economy had a big negative effect on growth last quarter. Instead of placing new orders with manufacturers, many companies whittled down their stockpiles. The lack of inventory investment dragged down the overall growth in GDP by nearly a full percentage point.

That could reverse if consumer spending picks up, providing a boost to output in the months ahead.

Still, other retailers this week expressed concern about consumers. Nestlé Chief Executive Mark Schneider on an investor call pointed to "fairly soft demand even in the face of pretty good fundamental economic data." He said that might have to do with lingering uncertainty, but that he remains optimistic about the rest of the year.

Government spending also fell in the first quarter, though those drops might be temporary. One possible factor: A three-month hiring freeze imposed by the Trump administration that was recently lifted. Declines in defense spending, which can vary greatly quarter to quarter, and state and local government spending could reverse later this year.

Perhaps the most encouraging sign from Friday's report is a pickup in business investment. Throughout most of the recovery, companies have largely put off building new factories and purchasing equipment. Those are the kinds of projects that make companies more efficient, boost worker productivity and, over the long haul, lift economic growth.

Such spending grew at a 9.4% rate last quarter, the fastest since late 2013. That coincides with surveys showing surging confidence among businesses following Mr. Trump's November election victory. Investment picked up broadly, but the biggest factor was a pickup in mining-related structures, reflecting a rebound in the energy industry that has led to renewed drilling and exploration projects.

Jason Furman, a Peterson Institute senior fellow who served as former President Barack Obama's top economic adviser, called the investment figures "exciting to see" after years of waiting for such an increase. "Maybe that rebound is finally here," he said.

Arrowsight Inc. says it has seen a rise in investment spending from clients. The Mount Kisco, N.Y.-based firm sells video-camera software to monitor business facilities for quality control. It has seen a bump in sales in recent months in the food industry, particularly among meat producers seeking to improve food safety and animal welfare, said Adam Aronson, the closely held company's chief executive officer.

"Typically when you see very big companies that are investing in things like that, it means that they're doing quite well," Mr. Aronson said. "In tougher times, those are nice to have -- not necessarily things that you would progressively invest in as much as we're seeing."

--Mike Colias contributed to this article.

Write to Josh Mitchell at joshua.mitchell@wsj.com

(END) Dow Jones Newswires

April 28, 2017 17:43 ET (21:43 GMT)