Washington, April 28

US economic growth braked sharply to its slowest pace in two years as consumer spending softened and a strong dollar continued to undercut exports, but a pick-up in activity is anticipated given a buoyant labour market.

Gross domestic product increased at a 0.5 per cent annual rate, slowest since the first quarter of 2014, Labour Department said today in its advance estimate, also as businesses doubled down on efforts to reduce unwanted merchandise clogging up warehouses.

The economy was also blind-sided by cheap oil, which has hurt the profits of oil field companies like Schlumberger and Halliburton, resulting in business spending contracting at its fastest pace since the second quarter of 2009, when recession was ending.

Economists polled by Reuters had forecast the economy expanding at a 0.7 per cent rate in the first quarter. The economy grew at a 1.4 per cent pace in fourth quarter.

Almost all sectors of economy weakened in the first quarter, with the housing market the lone star.

The slowdown in growth is likely temporary, given a fairly robust jobs market. Applications for unemployment benefits are near a 43-year low and employment gains averaged 209,000 jobs per month in the first quarter.

In addition the Institute for Supply Management’s manufacturing and non-manufacturing surveys, which are closely correlated to economic activity, have rebounded in recent months.

While the Federal Reserve on Wednesday acknowledged economic activity had ‘slowed’, it also said labour market conditions had ‘improved further’. The US central bank appeared to view the threats from global economy and financial markets as having diminished.

The Fed left its benchmark overnight interest rate unchanged and suggested it was in no hurry to tighten monetary policy further. It hiked rates in December for the first time in nearly a decade.

Economists also say model used by government to strip out seasonal patterns from data is not fully accomplishing its goal despite recent steps to address problem.

Residual seasonality has plagued first-quarter GDP, with growth under-performing in five of the last six years since the recovery started in June 2009.

Consumer spending, which accounts for more than two-thirds of US economic activity, increased at a 1.9 per cent rate. That was the slowest since first quarter of 2015 and was a deceleration from the fourth quarter’s 2.4 per cent rate.

Households have been frugal, cutting back on purchases of automobiles, despite cheap gasoline. Households appear to have socked away modest wage gains from the tightening labour market and the gasoline savings. They have also reduced their debt.

Income at the disposal of households after accounting for taxes and inflation increased 2.9 per cent in the first quarter.