US raises first-quarter growth estimate to 0.8 per cent

A shopper walks through lower Manhattan on March 4, 2016, in New York City.
A shopper walks through lower Manhattan on March 4, 2016, in New York City.PHOTO: AFP

WASHINGTON (AFP) - The US economy grew slightly faster in the first quarter of 2016 than originally thought, hitting a 0.8 per cent annual pace, the Commerce Department said on Friday.

The revision, from the original estimate of a very slow 0.5 per cent, was not as high as economists had expected, underscoring some persistent weaknesses, especially in manufacturing.

Even so, economists say that growth in the current April-June quarter has been firm enough to cast behind the early-2016 slump and that the United States will continue to solidly outpace other leading economies for the rest of the year.

Halfway through the second quarter, private and public growth estimates were that the economy has rebounded to a 2.5-3.0 per cent annual pace.

And Federal Reserve officials have made clear they think the first-quarter data understates the strength of the economy.

"More recent monthly data are signaling a much better performance in Q2 - if anything, better, than the 2.5 per cent pace in our forecast," said Jim O'Sullivan of High Frequency Economics.

For the January-March quarter, the revised data showed mostly the same weaknesses as in the original estimate, which was based on less complete gross domestic product data.

The main reason for the slowdown was a significant decline in business investment in buildings and equipment.

Part of that is linked to the sharp contraction in the energy industry, particularly oil and gas, after the crash in crude prices.

But in addition there was also a slowdown in consumer spending growth, despite an increase in household incomes due to strong job creation.

What improved the picture in the new estimate was higher business investment in inventories, and stronger home construction than originally thought.

The upward revision nevertheless did not tell a lot about how the economy is rebounding in the current second quarter.

The energy industry has continued to cut back and the strong dollar and weak foreign economies are still hampering exports, though not as severely as before.

Investment by companies could remain constrained. The Commerce Department said that corporate profits grew just a bare 0.3 per cent in the first quarter, after two straight declines, and were 5.8 per cent below a year ago.

On the positive side, home construction and consumer spending have improved in the current period.

On Friday the University of Michigan consumer sentiment index rose to 94.7, up from 89.0 in April, indicating a rise in consumer confidence after a late-winter downturn.

The report gave little new information to markets waiting for signs of strength in the economy that would push the Federal Reserve to increase interest rates in June or July.

But generally the reaction was positive.

On Wall Street the S&P 500 gained 0.2 per cent. The dollar rose 0.6 per cent on the euro, to US$1.1129, and the yield on the one-year Treasury bill ticked up a notch to 0.66 per cent from 0.65 per cent.