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Economy grew faster than expected in first quarter, the first since Trump's tax cuts

Washington Post

The U.S. economy grew at an annual rate of 2.3 percent in the first three months of 2018, the Commerce Department said Friday.

The results were slightly above Wall Street analysts' forecasts of 2 percent annual growth rate. The analysts had anticipated a slowdown from the fourth quarter's 2.9 percent growth rate.

The Commerce Department report was the first since President Donald Trump's tax cut took effect on Jan. 1. The centerpiece of the tax overhaul was a reduction in corporate taxes aimed at boosting investment and jobs. So far, there is little sign of the promised investment boom.

Nondefense capital goods orders, excluding aircraft, fell 0.1 percent in March and preliminary results from earlier months were revised lower, the Census Bureau said Thursday.

"That points to a sharp slowdown in business equipment investment in the first quarter, just as the corporate tax cuts were taking effect," Michael Pearce, senior U.S. economist for Capital Economics, wrote prior to the release of the GDP figures.

Weakness in the GDP report also was evident in consumer spending and government outlays.

"The trend is probably better than what you're seeing," said economist Jim O'Sullivan of High-Frequency Economics. "Quarterly data are volatile. You never want to get too caught up in a single number."

Gains from the tax cut are likely to be stronger in the second quarter as adjusted individual withholding allowances take full effect and tax refunds hit taxpayers' bank accounts, O'Sullivan said.

Higher federal government spending also will make its mark with O'Sullivan expecting a second-quarter rebound to an annual rate of 3.7 percent.

The latest GDP figures come as Federal Reserve Chairman Jerome Powell is trying to prevent the economy from growing so fast that it sparks a spiral of rising prices. The Fed raised short-term interest rates in March for the sixth time since 2015 when they were near zero.

Amid signs of labor market buoyancy, the Fed also raised its forecast, predicting the economy would grow at an annual rate of 2.7 percent, up from 2.5 percent in December. Employers around the country are reporting difficulty finding skilled workers with the unemployment rate at 4.1 percent and headed lower. First-time claims for unemployment insurance fell to 209,000 in the week through April 21, the lowest level since 1969.

"The Trump administration can stop looking for ways to bring jobs to America because almost everyone out there in the country who has a heartbeat has found employment already," economist Chris Rupkey of MUFG Union Bank told clients in a research note Thursday.

The economy is steaming ahead despite worries over a potential trade war with China. The Kansas City Federal Reserve Bank manufacturing index rose sharply in April amid optimism about future orders. "Factory activity accelerated in April despite concerns among many firms about changes in international trade policy," said economist Chad Wilkerson of the Kansas City Fed.

Since the expansion began nearly nine years ago, first-quarter economic growth has averaged just a 1.2 percent annual rate, less than half as fast as the other quarters, according to economist Jim O'Sullivan of High-Frequency Economics.

Economists say that repeated economic softness in the early months of the year may be due to seasonal adjustment issues with government data. In July, the Bureau of Economic Analysis is scheduled to overhaul its approach to economic scorekeeping for the first time since 2013, in part, to take account of those concerns.

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