WASHINGTON (Reuters) - The U.S. economy slowed in the first quarter as consumer spending grew at its weakest pace in nearly five years, but a surge in wages amid tightening labor market conditions and lower tax rates suggested the setback is likely temporary.
Gross domestic product increased at a 2.3 percent annual rate, the Commerce Department said in its snapshot of first-quarter GDP on Friday, also restrained by a moderation in business spending on equipment and investment in homebuilding.
These factors were partially offset by a rise in inventories and a narrowing of the trade deficit. The economy grew at a 2.9 percent rate in the fourth quarter. Domestic demand increased at a 1.7 percent rate, the slowest in two years, after rising at a brisk 4.8 percent pace in the final three months of 2017.
The moderate first-quarter growth is, however, probably not a true reflection of the economy’s health as GDP tends to be sluggish at the start of the year because of a seasonal quirk.
Economists expect growth will accelerate in the second quarter as more households feel the impact of the Trump administration’s $1.5 trillion income tax package on their paychecks. The tax cuts came into effect in January.
Lower corporate and individual tax rates as well as increased government spending will likely lift annual economic growth close to the administration’s 3 percent target. Economists polled by Reuters had forecast output rising at a 2.0 percent rate in the January-March period.
“Tax cuts and government spending increases should lead to better overall economic activity,” said Joel Naroff, chief economist at Naroff Economic Advisors in Holland, Pennsylvania.