Our thoughts are below, but for reference you can click to enlarge these two charts. The first, via RQD Economics, shows the change in each of the categories that contribute to the GDP number:
The second, from the BEA, shows the relative contribution of each category and its sub-categories:
A few notes:
1) After the Q4 report, James Hamilton commented on the inverse relationship between the contribution to the change in GDP made by inventories and that made by imports. When inventories have increased (contributing positively), imports have also tended to increase (contributing negatively), and vice versa.
The reasoning is straightforward: businesses have been either importing products or selling them out of inventory. When they do more of one, they do less of the other. The two aren’t a perfect substitute, of course, but that general relationship has held impressively in recent years.
It held again in the first quarter. The increase in imports reduced the change in the headline real GDP number by 0.72 percentage points, while climbing inventories increased it by 0.93. That’s a reversal for these these two from contributions of +2.21 and -3.42, respectively, in the fourth quarter.
And it’s a big reason that trade essentially made no impact in the real GDP change this quarter (a modest -0.08 contribution).
Probably the greater disappointment is on the exports side. Exports climbed by less than the steadily accelerating pace of the previous few quarters. We had a feeling this was coming after the February trade balance was announced, which was among the events prompting economists to lower their estimates for Q1. We haven’t seen a convincing explanation for the slowdown in US exports, especially given the fall in the dollar, other than jargon-y comments about “global headwinds” and the like.
2) Consumption didn’t fall by as much as feared. Yes, high commodity prices ate into spending, and higher overall inflation also lowered personal consumption expenditure in real terms. Real PCE was up 2.7 per cent, which is less than the 4.1 per cent increase in the fourth quarter, and disappointing given the economy’s ostensible trajectory at the start of the year. But it’s better than analysts expected given all that happened in Q1, and it probably means that spending increased in March on the first two months of the year.
Yet nominal PCE actually climbed 6.6 per cent, which according to RQD is the highest increase since the fourth quarter of 2005. If inflation does indeed moderate and this level of activity keeps up, consumption should resume on its previous trend in real terms, especially if the labour market continues to improve.
3) Equipment and software spending by businesses continued to increase steadily and made a meaningful contribution.
But there was a huge fall of 21 per cent in business structures. This reduced the first quarter change in real GDP by a considerable 0.63 percentage points.
For insights on anything related to structures we rely on Calculated Risk, who notes that non-residental investment in structures typically lags a recovery. Let’s hope so.
As for residential investment, it declined again, reducing real GDP growth by a small 0.09 percentage points. Calculated Risk expects that this decline is nearing its end, meaning that RI will start contributing positively towards growth this year. The sooner the better.
4) Government spending, of course, was a major drag, with a big decline in defense spending. But even at the state level there was a big decline in gross investments. We’re not experts in the former, but we certainly don’t expect the latter to change in the foreseeable future.
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There’s no way to spin this report from bad to good. It wasn’t in good’s zip code. Some of the details do indicate that at least things aren’t as bad as the headline number would suggest, but this is still a weak, sputtering recovery.
If you’re looking for silver linings, the consumption numbers were mildly encouraging, and the disappointment over this quarter’s results is also a combination of expectations running ahead of themselves at the end of Q4 and the big shocks we had in Q1. When you combine the last two employment reports with ongoing non-structures investments by businesses and robust corporate earnings, there are still a few hopeful signs (of private-sector activity).
The downers would include the expected drag from the public sector, more house price declines, further big shocks, the possibility that inflation turns out not to be transitory, and uncertainty around what’s happening with the trade balance.
And even those categories that are doing relatively well are disappointing for this stage in a recovery — especially one coming off such a deep recession.
Related links:
Advance Report: Real Annualized GDP Grew at 1.8% in Q1 – Calculated Risk
Disappointing first quarter GDP – Mark Thoma