GDP Growth Holds at 1.8%, Missing Estimates

Reuters

Corporate profits in the U.S. unexpectedly contracted in the first quarter to record their first decline in more than two years and the economy grew at the same pedestrian pace as previously estimated, a government report showed on Thursday.

After-tax corporate profits fell at a rate of 0.9 percent, the Commerce Department said, after rising at a 3.3 percent rate in the fourth quarter. The drop in profits, the first since the fourth quarter of 2008, likely reflected a slowdown in productivity growth as businesses stepped up hiring. Economists had expected corporate profits to grow at a 2.3 percent pace.

Continue Reading Below

Gross domestic product growth was unrevised at annual rate of 1.8 percent, the department said in its second estimate, below economists' expectations for a 2.1 percent pace.

Indications are that the sluggish growth tone persisted early in the second quarter, with retail sales lackluster and supply chain disruptions from the earthquake in Japan depressing motor vehicle production. The economy expanded at a 3.1 percent rate in the fourth quarter.

Though overall GDP was unrevised, the report showed a bigger increase in restocking by businesses and slightly higher capital outlays, which helped to offset downward revisions to consumer spending.

Business inventories increased $52.2 billion, well above the initially reported $43.8 billion rise. The change in inventories added 1.19 percentage points to GDP growth.

But a decline in vehicle production so far in this quarter because of shortages of parts from Japan could cause a drawdown in inventories and weigh on growth in the April-June period. Motor vehicle output added 1.28 percentage points to first- quarter GDP.

Business investment rose at a 3.4 percent rate instead of 1.8 percent as the drop in spending on non-residential structures was not as steep as previously estimated. Business spending grew at a 7.7 percent pace in the fourth quarter.

Consumer spending -- which accounts for more than two-thirds of U.S. economic activity -- expanded at a much slower 2.2 percent rate in the first three months of this year instead of 2.7 percent.

After rising at a 4 percent clip in the fourth quarter, spending was dampened by high food and gasoline prices, which sent inflation rising at its fastest pace in 2-1/2 years.

The personal consumption expenditures index rose at an unrevised 3.8 percent rate in the first quarter. That compared to the fourth quarter's 1.7 percent increase.

The core PCE index closely watched by the Fed advanced at a 1.4 percent rate rather than 1.5 percent. Fed officials would like to see this measure close to 2 percent.

While exports were much stronger than previously estimated, imports also accelerated, resulting in trade having a muted impact on growth. Government spending contracted at a 5.1 percent rate rather than 5.2, with defense outlays dropping at an unrevised 11.7 percent rate.

What do you think?

Click the button below to comment on this article.