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Decline in inventories restrains US economic growth in first quarter

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WASHINGTON - U.S. economic growth slowed more than expected in the first quarter as an acceleration in consumer spending was offset by businesses cutting back on inventory investment in anticipation of weaker demand this year amid higher borrowing costs.


The Commerce Department's advance first-quarter gross domestic product report on Thursday also showed business spending on equipment contracting for a second straight quarter.


While the economy was not in recession last quarter, the outlook is darkening. Credit conditions have tightened following recent financial market turmoil, which together with the Federal Reserve's fastest rate hiking cycle since the 1980s have raised the risks of a downturn by the second half of the year.


"The outlook is uncertain," said Rubeela Farooqi, chief U.S. economist at High Frequency Economics in White Plains, New York. "Our base case is that the lagged and cumulative effects of restrictive policy will keep the economy growing at a below potential pace over coming quarters." Gross domestic product increased at a 1.1 per cent annualized rate last quarter, the government said in its advance estimate of first-quarter GDP growth. The economy grew at a 2.6 per cent pace in the fourth quarter. Economists polled by Reuters had forecast GDP rising at a 2.0 per cent rate.


Inventory investment declined at a $1.6 billion pace after increasing at a $136.5 billion rate in the fourth quarter. Inventories chopped off 2.26 percentage points from GDP growth.


Excluding inventories, government and trade, the economy grew at a 2.9 per cent rate. This measure of domestic demand was flat in the fourth quarter.


The Federal Reserve is on track to raise interest rates by another 25 basis points next week, which is expected to be the last hike in the current cycle. The Fed has hiked its policy rate by 475 basis points since March of last year from the near-zero level to the current 4.75 per cent -5.00 per cent range.


Following January's surge, which economists attributed to unseasonably mild weather and difficulties adjusting the data for seasonal fluctuations, economic reports have taken a weaker tone, with retail sales slumping in February and March.


Still, in the January-March period consumer spending grew at a rate faster than the pedestrian 1.0 per cent pace logged in the fourth quarter. Consumer spending, which accounts for more than two-thirds of U.S. economic activity, is being underpinned by a tight labor market, characterized by a 3.5 per cent unemployment rate.


LABOR MARKET REMAINS TIGHT A separate report from the Labor Department on Thursday showed initial claims for state unemployment benefits decreased 16,000 to a seasonally adjusted 230,000 for the week ending April 22. Economists had expected 248,000 claims in the latest week. Though claims, which have elevated since March, remain well below levels that could raise alarm about the labor market, reduced access to credit for businesses and households is seen hurting demand and ultimately employment.


The number of people receiving benefits after an initial week of aid, a proxy for hiring, fell 3,000 to 1.858 million during the week ending April 15, the claims report showed.


The so-called continuing claims data covered the period during which the government surveyed households for April's unemployment rate.


Continuing claims remain low by historical standards as some of the laid-off workers are quickly finding employment. There were 1.7 job openings for every unemployed person in February.


Despite the darkening clouds over the economy, some economists were hopeful a recession could be avoided. They noted that fears of a downturn were pushing down prices of commodities like oil, which could help to reduce cost pressures for businesses and benefit the overall economy.


Oil prices have erased all their gains since the Organization of the Petroleum Exporting Countries and producer allies such as Russia announced in early April an additional output reduction until the end of the year. — Reuters


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