The U.S. economy is picking up speed after a slow start to the year, with resilient consumer spending and a buoyant housing market just about making up for a falloff in investment by cautious companies.
But the overall gains are still likely to fall short of what many experts — not to mention ordinary workers — would hope to see as the recovery nears the end of its seventh year.
These crosscurrents highlight the challenge facing policymakers at the Federal Reserve as they weigh whether to raise interest rates when they meet in mid-June or wait until July or later in the year.
On Friday, the Commerce Department raised its estimate of the pace of growth in the first quarter of 2016 to 0.8 percent, a move driven mostly by better data on inventories and housing. Other areas of the economy, especially manufacturing and mining, still face significant headwinds.
Sign Up and Save
Get six months of free digital access to The Kansas City Star
One explanation for the hesitancy of businesses to spend is pressure on earnings after several years of expanding margins. The Commerce Department said corporate profits rose just 0.3 percent in the first quarter after a 7.8 percent drop in the fourth quarter of 2015.
“It just confirms that we had a soft start to the year, but not quite as bad as we thought,” Ethan Harris, head of global economics at Bank of America Merrill Lynch, said Friday. “Business investment was very weak, but the one bit of positive news was a surge in home construction. We’re still in the recovery stage in the real estate market, especially for multifamily buildings.”
The government’s initial estimate of first-quarter economic activity, released in late April, showed an annual growth rate of 0.5 percent. The third and final estimate for growth will be released June 28.
For the second quarter, which covers April, May and June, most experts forecast that the pace will pick up to about 2.5 percent.
Underscoring the consumer’s ability to shrug off the anxiety that has gripped some businesses, the University of Michigan said Friday that its monthly survey of consumer confidence in May showed sentiment at its healthiest level since June 2015. Expectations for future growth improved among both high-income and middle-income households, according to the University of Michigan researchers.
The reports Friday also suggest that 2016’s economic trajectory will follow an arc that has bedeviled forecasters for years: a soft first quarter followed by a turnaround in the spring, even though underlying conditions remain largely the same throughout the period.
“There is better momentum now, but it’s still a bit of a head fake,” said Diane Swonk, an independent economist based in Chicago.
The seasonal kinks in the data can “create a false sense of security,” she said, obscuring the continuing paucity of real economic gains for many Americans over time. “It was still a tepid quarter, even if it was less bad. That doesn’t equal good growth.”
Ian Shepherdson, the chief economist at Pantheon Macroeconomics, said positive recent indicators like retail sales and buoyant home prices in April strengthened the hand of Fed hawks, although they could wait as markets remain anxious before Britain’s June 23 referendum on whether to exit the European Union.
With the Brexit vote looming, one alternate possibility would be for the Fed to hold off in June but telegraph that it plans to move at its July gathering, Shepherdson said.
Next week should provide greater clarity about the economy’s real momentum. On Tuesday, the Commerce Department will report on consumer income and spending in April, and Friday will bring the Labor Department report on May unemployment and hiring, a crucial metric for the Fed.
Buried in the details of the GDP report on Friday were signs that inflation was picking up to more normal levels after years of dormancy, Harris said. In particular, he said, the core measure of consumer prices rose at an annual rate of 2.1 percent in the first quarter, just above the Fed’s 2 percent target.
“This nudges the Fed closer to a rate hike, although June is still very much up in the air,” Harris said. “They want to see clear evidence that the second quarter is stronger than the first quarter.”