US economic growth probably slowed in the first quarter, data is expected to show on Friday, but resurgent consumer spending should offer evidence of a sustainable recovery.
The economy expanded at a 3.4% annual rate in the first three months of the year, economists polled by Reuters believe. That would mark a slowdown from the 5.6% pace logged in the fourth quarter when the economy got a big lift as businesses curbed efforts to cut inventories.
The advance report on US gross domestic product from the Commerce Department due at 8:30 a.m. should mark three straight quarters of growth as the economy digs out of its worst recession since the Great Depression.
GDP measures total goods and services output within US borders.
Though the economy took a step back from its brisk pace in late 2009, Friday's report should show areas such as consumer and business spending proved more robust in the first quarter, analysts said.
The bulk of the growth in the fourth quarter came as businesses met more demand with new production and less by selling off goods sitting on the shelf.
Inventories are expected to play a lesser role in the first quarter, when consumers are seen taking up the baton.
“The key thing for sustaining and growing the US economy is consumer spending. Everything we know about the first quarter is looking very strong in that area,” said Kurt Karl, head of economic research at Swiss Re in New York.
Data that has already come in on consumer spending has been robust. Analysts expect consumer spending during the quarter grew at a rate anywhere between 3.2% and 4%.
Consumer spending, which normally accounts for about 70% of US economic activity, grew only at a 1.6% pace in the fourth quarter.
There have been worries the US recovery, which has been led by the manufacturing sector as businesses begin to rebuild inventories, could sputter if consumers did not come on board. These concerns are beginning to take a back seat.
HANDOFF TO CONSUMERS
“There is growing evidence of a handoff from stimulus and inventory-driven growth to broader sources of demand, although we still look for overall moderate growth,” said Julia Coronado, an economist at BNP Paribas in New York.
The Federal Reserve on Wednesday noted economic activity had continued to strengthen in recent week and the labor market was starting to improve.
However, saying it sill expects a modest recovery, it left benchmark overnight lending rates near zero and renewed its vow to keep them low for an extended period.
While inventories will still contribute to first quarter growth, it will be far less than the 3.8 percentage points of US growth it accounted for in the fourth quarter.
Excluding inventories, the economy is expected to have expanded at a 2.1% rate, up from 1.7% in the fourth quarter.
Boding well for the recovery is business spending on software and equipment, which is expected to have continued its upward trend in the January-March period.
“If they are spending on equipment already, it shows a lot of confidence for the future hiring which supports consumer spending. If we continue to have employment growth, we will have a good year,” said Swiss Re's Karl.
Last month the economy enjoyed the strongest jobs growth in three years as private employers stepped up hiring.
Investment in new homes, which showed some hesitancy early this month, is expected to be a drag on growth in the first quarter - after two quarters of gains. Spending on structures likely subtracted from GDP for a seventh straight quarter.
With some of the rise in domestic demand being met through imports, a wider trade deficit will chip at growth in the first quarter. (Reuters)