- In contract to expectations only a few short weeks ago, the U.S. economy accelerated to 3.2% (annualized) in the first quarter, from 2.2% in the final quarter of 2018. However, the acceleration was built on shaky foundations, as half of the quarter’s growth was due to a buildup inventories (0.7 percentage points) and a decline in imports, which meant net trade added one percentage point to growth.
- Stripping these effects away, final domestic demand was up a softer 1.5% in Q1, a modest slowing from 2.1% in Q4.
- Much of the weakness in domestic demand was due to a soft consumer spending. As expected, PCE rose only 1.2%, less than half of the fourth quarter’s pace. Durable goods fell 5.3%, after rising 3.6% in the fourth quarter. Spending on nondurable goods (+1.7%) and services were also soft (+2.0%).
- At the same time, personal disposable income growth remained sturdy (3.0%), so weak spending lifted the personal savings rate to 7.0% from 6.8% in Q4.
- Business investment rose 2.7%, down from 5.4% in the fourth quarter, but still better than we had been expecting. Spending on intellectual property was up briskly (+8.6%), while equipment outlays cooled to 0.2% gain (after advancing 6.6% in Q4). As expected, investment in structures fell (-0.8%) for the third straight quarter, on broad based declines.
- Residential investment fell (-2.8%) for the fifth consecutive quarter, entirely due to weakness in single-family home construction. Other components of residential investment rose (activity in the resale market, and multifamily construction).
- Government spending rose 2.4% as strong outlays at the state and local level (+3.9%) and on national defense (+4.1%), offset a 5.9% drop in nondefense federal spending, likely due to the government shutdown.
- Exports growth was a little stronger than expected, up 3.7%. however, a hefty 3.7% decline in imports meant that net trade added a full percentage point to growth.
- Finally, price pressures were also a bit softer than expected in the first quarter, with the core PCE deflator up only 1.3% annualized.
Key Implications
- GDP growth in the first quarter is quite the mixed bag. On the one hand, underlying growth is not as strong as the headline suggests, as the boost from inventories and weakness in imports are likely to be reversed in the second quarter, dampening economic growth. On the other hand, the 1.5% pace of domestic demand was also held back by temporary factors like the government shutdown, and is likely to improve in the second quarter.
- As we try to see the forest amidst a thicket of trees, underlying momentum in the U.S. economy has cooled from the tax-cut driven boost of 2018, but remains solid and roughly in line with our latest forecast.
- Today’s report does not banish the downside risks looming in the global economy. It looks like the worst case scenario on the China-U.S. tariff escalation won’t come to pass, but it is unclear if current tariffs will be lifted. Fiscal risks in Washington still loom as the year progresses.
