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U.S. Economy Lost Some Steam at Start of Second Quarter

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05/15/2019 | 03:03pm EDT

By David Harrison and Austen Hufford

The U.S. economy got off to a sluggish start in the second quarter, with both consumers and manufacturers pulling back in April amid trade tensions, a global slowdown and waning effects of the 2017 tax cuts.

Retail sales fell a seasonally adjusted 0.2% in April from the previous month, the Commerce Department said Wednesday, driven by declines in categories such as electronics, home improvement, motor vehicles, auto parts and at online shopping businesses.

Factory output dropped a steeper 0.5% in April from March, according to Federal Reserve data, the third monthly decline in the past four months. It was down 2.1% in the first quarter on an annualized basis.

A closely watched measure of U.S. freight demand also is sending a troubling signal. The Cass Freight Index for shipments dropped 3.2% in April, the fifth straight month in negative territory. The authors of the report, Cass Information Systems, said the numbers signal "material and growing downside risk to the economic outlook."

Together, the reports suggest the U.S. economy lost momentum after growing at a 3.2% annual rate in the first quarter.

Macroeconomic Advisers, a forecasting firm, lowered its second-quarter economic growth estimate to a 2% rate from 2.1% in response. Oxford Economics lowered its forecast to a 1.6% pace from 1.7%.

Economists had expected the second quarter to be weaker than the first, when output was buoyed in part by a decline in imports and an increase in inventories, offsetting weaker gains in consumer spending and business investment. But the new data suggested there could be "maybe a little more of a step down than we initially thought," said Michael Feroli, chief economist at J.P. Morgan.

Overall, the U.S. economy remains strong. Employers added 263,000 jobs in April, unemployment reached a near-50-year low and wages continued to inch up -- all encouraging signs for household pocketbooks. Economists warned against overreacting to Wednesday's batch of wobbly data.

"As long as the labor market holds in, I don't think it's an existential issue for the expansion," which began nearly 10 years ago, said Mr. Feroli.

If he is right, the U.S. economy in June will mark a decade without a recession, the longest stretch on record. "I think we're going to make it to our 10th birthday," he said.

The fall in retail sales could be partly because tax refunds weren't as generous as consumers expected, perhaps prompting households to put off major purchases, he said.

Sales have been volatile in recent months, dropping in February before bouncing back in March.

Economists also saw the April retail-sales decline as a sign that households might be rattled by the trade dispute between the U.S. and China. Last week President Trump said that tariffs on $200 billion in Chinese goods would rise to 25% from 10%. The president left open the possibility of additional actions. China retaliated by raising tariffs on $60 billion of U.S. imports.

As the stimulus from recent tax cuts and increased federal spending dissipates and the trade fight escalates, "you're going to see stronger headwinds that will curb growth in consumer spending," said Gregory Daco, chief U.S. economist at Oxford Economics.

Some of the recent manufacturing contraction is likely due to the large buildup in inventories in the first quarter, analysts said. That means factories don't need to produce as much to meet demand.

But the persistent weakness since the start of the year suggests American factories have been squeezed by trade tensions, a weaker global economy and a strong dollar, which makes U.S. exports more expensive in world markets.

"I don't think there's any way to put lipstick on the manufacturing numbers," said Joshua Shapiro, chief U.S. economist at MFR Inc. "The growth isn't there. The domestic demand in the U.S. is pretty decent, but export demand is weakening."

At Thomaston Mills, a bedsheet maker in Thomaston, Ga., production is slower this year because orders are down. Custom orders for the company's bedding and towels typically rise when hoteliers are confident in the economy, said plant manager Jimmy Bond.

Notebook maker Top Flight Inc. recently received a big order that will boost production for the first time in several years, said Chief Operating Officer Wejun Robinson.

But rising costs for paper, overtime and imports as a result of tariffs on goods from China are hurting the Chattanooga, Tenn.-based company's profit, he said. Top Flight's margins will be even thinner than expected after the Trump administration increased tariffs on goods including some notebook varieties it doesn't make in the U.S. to 25% last Friday from 10% previously.

"We priced our products at the 10% rate," Mr. Robinson said. "It will make a difference."

Important U.S. trading partners such as China and Germany are going through a volatile period as fears of a broader trade war depress confidence.

Growth in Chinese retail sales, industrial output and investment in fixed assets slowed in April despite a heavy dose of government stimulus.

In Germany, new factory orders are slowing and major manufacturers such as Continental AG and Daimler AG posted lower first-quarter earnings. But domestic consumption and a strong construction sector helped support the German economy in the first quarter.

--Paul Page contributed to this article.

Write to David Harrison at david.harrison@wsj.com and Austen Hufford at austen.hufford@wsj.com

Stocks mentioned in the article
ChangeLast1st jan.
CASS INFORMATION SYSTEMS, INC. -0.40% 51.72 Delayed Quote.-2.27%
CONTINENTAL AG -0.52% 117.56 Delayed Quote.-2.64%
DAIMLER AG -1.42% 48.425 Delayed Quote.5.48%
ONE STOP SYSTEMS, INC. -2.30% 2.55 Delayed Quote.31.44%
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