First-quarter GDP seen at 3 percent but momentum ebbs

Economic growth probably gained steam in the first quarter on strong consumer spending, but the momentum is already ebbing and could slow further as the impact of automatic government spending cuts kick in.

Gross domestic product likely expanded at a 3.0 percent annual rate, according to a Reuters poll of economists, after growth nearly stalled at 0.4 percent in the fourth quarter.

Part of the expected acceleration in activity will reflect farmers filling up silos after a drought last summer decimated crop output. Removing farm inventories, growth would probably be around a mediocre 2 percent rate, economists said.

"If we do come in near consensus, it will be a false positive reading for the economy," said Robert Dye, chief economist at Comerica in Dallas. "It is still in that weak-to-moderate growth range of around 2 percent and is still struggling to maintain forward momentum."

The Commerce Department will release the first-quarter GDP report on Friday at 8:30 a.m (1230 GMT).

Given signs the economy has weakened in recent weeks, the GDP data will probably not get much play in U.S. financial markets. It is not expected to carry a lot weight at next week's Federal Reserve policy meeting either. The U.S. central bank is widely expected to keep purchasing bonds at a pace of $85 billion a month.

"The reality is the deceleration in the data that we have seen in the last weeks is going to be at the forefront, especially when you look at the Fed meeting next week," said Jacob Oubina, a senior U.S. economist at RBC Capital Markets in New York. "They are going to mark down their economic assessment. The second quarter is tracking closer to 1 percent."

Data ranging from employment to retail sales and manufacturing weakened substantially in March after robust gains in the first two months of the year. There are indications the weakness persisted into April.


The GDP report is expected to show contributions to growth from all areas of the economy, with the exception of government, trade and investment by businesses in offices and other commercial buildings.

Consumer spending, which accounts for more than two-thirds of U.S. economic activity, is expected to have increased at around a 3 percent pace, which would be its fastest since at least the first quarter of 2011. It grew at a 1.8 percent rate in the fourth quarter.

Much of the anticipated gains in first-quarter spending are expected to come from automobile purchases and outlays for utilities, which were boosted by unusually cold temperatures. Consumers managed to step up their spending despite the return of a 2 percent payroll tax and higher gasoline prices.

Another big contributor is expected to be a much faster pace of inventory accumulation. Inventories are expected to add as much as a full percentage point to GDP growth after chopping off 1.5 points from output in the final three months of last year.

While business spending on equipment and software likely slowed, it is still expected to have added to growth.

Economists caution that it is too early to blame the cooling in business investment and other more recent signs of economic softness on the $85 billion in mandatory government spending cuts, known as the sequester, that began on March 1.

"I don't think we are going to feel the full drag of that until the third quarter, so we got a ways to go before we fully understand what the full effects of fiscal tightening are," said Comerica's Dye.

Homebuilding is expected to have marked an eighth straight quarter of growth, though the pace probably moderated from the fourth quarter. Housing added to growth last year for the first time since 2005 and its recovery should help ensure the economy does not contract.

The stronger dollar during the quarter likely weighed on export growth, with the resulting trade deficit being a drag on output. The dollar strengthened about 4 percent on a trade-weighted basis from January through March.

"This is coming at a time when the global economic recovery is beginning to show signs of strain," said Millan Mulraine, a senior economist at TD Securities in New York.

(Reporting by Lucia Mutikani, editing by Tim Ahmann and Kenneth Barry)