In yet one more disquieting economic report, data issued earlier this morning showed that the nation's gross domestic product rose by an improving 2.5% in the opening quarter of this year. However, while this was a notable step-up from last year's final period, which saw just nominal growth of 0.4%, this latest metric was materially below the 3.2% rate of gain that had recently emerged as the consensus view.

The report, meanwhile, could heighten fears that the economy will have a tougher time handling the deep government expenditure reductions put into place last month than had been expected.

According to the findings, some of the acceleration in activity reflected an increase in inventories, most specifically, farmers filling up their reserves in the wake of the drought last summer. If we take inventories out of the equation, GDP growth would have been closer to 1.5%. Material inventory reductions had been a big factor in the near stalling in growth during last year's concluding quarter.

The less-than-compelling GDP performance also reflected a marked slowdown in activity during March. To wit, recent weeks have seen a succession of key reports showing uneven growth in employment, consumer spending, manufacturing, industrial production, and non-manufacturing. Thus, the late first-quarter weakening was not wholly unexpected. In fact, we have been cautioning for some weeks now that growth had faltered late in the period.

Meanwhile, breaking down the report, we find that consumer spending, the engine that largely drives the economy, as it accounts for some two-thirds of aggregate  increased by 3.2% last quarter, the fastest pace since the concluding three months of 2010. That certainly is an encouraging trend. Moreover, the aforementioned 3.2% rate of increase was notably better than the 1.8% gain recorded during the prior quarter.
Importantly, much of this consumer gain, though, came from spending on automobiles and outlays for utilities, with the latter variable boosted by the cold winter temperatures, which had blanketed much of the nation earlier this year. Additionally contributing to growth were gains in exports, residential investment, and nonresidential fixed investment. These variables were partly offset by negative contributions from federal government spending and state and local government spending.

Adding it all up, the report was clearly better than the one that preceded it, but nowhere near what had been expected. This late first-quarter falloff, meantime, is not a good omen for the current three months, when we could very well see growth move back down into the 1%-2% range.

At the time of this article's writing, the author did not have positions in any of the companies mentioned.