The economy grew at a 2.2% annualized pace in the first quarter, based on the initial estimate, which was mildly disappointing as compared to the market’s expectation of 2.5%. The result also reflected a slowdown from the fourth quarter growth pace of 3.0%, but still shows the economy remains in an expansionary phase.
Consumers accounted for much of the growth in the first quarter, as personal consumption grew at a 2.9% annualized pace, the best showing since the final quarter of 2010. Business investment, however, slowed considerably, suggesting that the corporate sector may be wary about the durability of the expansion. Meanwhile, government spending contracted again in the first quarter. Ongoing budgetary challenges and fiscal deficits continue to strain public sector finances, and those pressures are unlikely to abate any time soon.
The perceived improvement in the job market earlier this year provided a boost to consumer sentiment. That improved mood, coupled with mild weather that provided a nudge to consumers to head to the stores, boosted spending during the quarter. Nonetheless, much of that improvement may prove to be transitory, representing expenditures pulled forward from the second quarter. Recently disappointing economic data on a variety of fronts, including those related to the labor market, may be indicative of some cracks in the foundation for the quarters ahead.
While the economy continued to grow in the first quarter, the expansion remains modest in pace and subpar from a historical perspective. The economy is still on an uncertain footing and a window of risk exists, given the global slowdown that is unquestionably underway and the recessionary environment now enveloping multiple developed economies. Recently disappointing economic data and lingering concern that unseasonably warm weather and the skewing effect of seasonal adjustments to that data may have created a misplaced sense of confidence that the economy was breaking free from its lackluster growth path. We anticipate that a truer picture will come into focus in the months ahead, and that may be less rosy than believed at the outset of the year.
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