U.S. Gross Domestic Product

U.S. Economy Still in the Slow Lane

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A sharp decline in auto sales was a major drag on consumer spending. General Motors had the largest decline falling 7% in February.

Business investment remains sturdy but growth continues at a moderate pace as consumer spending falls to lowest level in five years.

The U.S. economy lurched toward the milestone $20 trillion mark as first quarter gross domestic product (GDP), the broadest measure of economic output, expanded at a modest 2.3 percent seasonally adjusted annualized rate, according to the advance estimate released Friday from the Commerce Department.  The amount is a potential setback for an economy struggling to attain 3 percent annual growth.

The first quarter figure exceeded the 2.0 percent estimate of many analysts but was still disappoininting as it breaks a string of three straight quarters in which the economy averaged 3.07 percent growth something it will have to do in order to reach the important 3 percent annual growth number.  The 2.3 percent amount, however, was an improvement over the opening quarters of the previous two years.

Gross private domestic investment, an important indicator of future productive capacity, grew at a robust 7.3 percent clip from the previous quarter led by business spending and a postive increase in business inventories.  It was the fourth straight quarter of overall supply-side growth and it contributed to the majority of growth for the first time since the second quarter of 2014, a quarter in which GDP expanded at 4.6 percent.

Consumer spending, however, was dismal increasing by only 1.1 percent from the previous quarter, the lowest amount since the second quarter of 2013 when American consumers increased their spending by only 0.8 percent.  Automobile sales were the main reason as they experienced their sharpest decline in seven years, according to the Commerce Department data.  

Residential investment, a key measure of the housing market, didn't grow at all after registering a fourth quarter spurt of 12.8 percent, the largest increase since the second quarter in 2014.  Poor auto sales and a flat housing market could mean trouble as American's seem to be pulling back on the two biggest consumer spending items in the economy.

The U.S. economy is sending mixed signals as the increase in business investment is a welcome sight for an economy that for the past few years had become overly dependent on consumers for a majority of its growth, however, the fall in consumer spending now threatens to become a drag on positive supply-side growth.

But the good news is that the investment side of the economy seems to be stabilizing around the 6.8 percent level, which is not as strong as in 2013 and 2014, but those years were aided by $2.2 trillion in Federal Reserve stimulus, known as QE3, that pumped money into the economy until October 2014.