The U.S. economy expanded in the first quarter at the slowest pace in two years as American consumers reined in spending and companies tightened their belts in response to weak global financial conditions and a plunge in oil prices.
Gross domestic product rose at a 0.5 percent annualized rate after a 1.4 percent fourth-quarter advance, Commerce Department data showed Thursday. The increase was less than the 0.7 percent median projection in a Bloomberg survey and marked the third straight disappointing start to a year.
Shaky global markets and oil’s tumble resulted in the biggest business-investment slump in almost 7 years, and household purchases climbed the least since early 2015, the data showed. While Federal Reserve officials on Wednesday acknowledged the softness, they also indicated strong hiring and income gains have the potential to reignite consumer spending and propel economic growth.
“Even as there are lots of things still going for consumers, you look at confidence and spending and it’s close to the lows of the past few quarters; it’s hard to explain,” Millan Mulraine, deputy head of U.S. research and strategy at TD Securities USA LLC in New York, said before the report. “The headwinds will be somewhat diminished for growth” in the next few quarters, he said.
Economists’ projections for GDP, the value of all goods and services produced in the U.S., ranged from gains of 0.1 percent to a 1.5 percent. This is the government’s first of three estimates for the quarter before annual revisions in July.
Household purchases, which account for almost 70 percent of the economy, rose at a 1.9 percent annual pace last quarter, compared with 2.4 percent in the final three months of last year.
Spending, while slightly better than the 1.7 percent median forecast, was a disappointment in light of the consumer-friendly fundamentals including low gasoline prices, cheap borrowing costs, increased hiring and warmer-than-usual winter weather.
“The first quarter is going to be the worst quarter for consumption for all of 2016,” said Jacob Oubina, a senior U.S. economist at RBC Capital Markets LLC in New York. “With financial markets calming down and retracing all of their losses, the fundamental factors that have driven consumption will continue to do so.”
The GDP report showed disposable income adjusted for inflation climbed 2.9 percent in the first quarter, an improvement from the 2.3 percent gain in final three months of
2015. The saving rate ticked up to 5.2 percent from 5 percent.
The biggest factor weighing on the economy last quarter came from companies. Nonresidential fixed investment, or spending on equipment, structures and intellectual property, dropped at a 5.9 percent annualized pace, the biggest decline since the second quarter of 2009.
Last year’s slump in oil prices that extended into early 2016 led to an 86 percent annualized plunge in capital spending on wells and shafts, the most in records back to 1958.
Investment is also languishing as corporations struggle to boost profits against a backdrop of weak overseas demand and restrained domestic purchases.