Weak spending growth just a blip

The latest data indicate that GDP growth was no more than 2.5% annualised in the first quarter, with real consumption growth slowing to around 2%. That would hardly be a disaster, but is disappointing given the boost to disposable incomes from the recent tax cuts. Some of that slowdown is due to the unwinding of the surge in vehicle sales late last year as well as the unusually warm winter which has curbed heating demand. More fundamentally, payroll gains have accelerated sharply since the beginning of the year. Consumer confidence hit a 14-year high in March, suggesting that households will spend their tax savings soon. The upshot is that we still expect GDP growth to accelerate this year, to 2.8%. That would keep the Fed on track to raise interest rates four times this year, beginning with a 25bp hike later today.