Headline Q1 GDP Masks Soft Underbelly Of US Growth

By Glenn Dyer | More Articles by Glenn Dyer

So did the US Federal Reserve reverse course on monetary policy too soon and abandon its rate rising stance earlier this year.

Judging by the surge in US first-quarter growth the answer would be ‘Yes’.

But that’s a simplistic notion because the first quarter GDP report, released on Friday suggests the American economy is not as solid as the 3.2% annual rate of growth suggests.

Economists caution that there are a couple of factors that may not be repeated over the rest of the year and could very well detract from growth as we move deeper into 2019.

The GDP report shows consumer spending slowed, business inventories soared (especially unsold cars and other manufacturers) and final demand – which is a good measure of domestic demand in the US economy – slowed to its slowest rate of growth in nearly six years.

In fact, there were hints of similarities with the current performance of the Australian economy which is stuck in the group of weak domestic price pressures, stagnating consumer demand, a solid labour market, and trade account.

The first of three reports show that US economy started 2019 strongly with GDP growing at an annual rate of 3.2% in the three months to March 31, higher than forecasts around 2.3% and 2.4% and sharply higher than the 4th quarter figure of 2.2%.

While a surprisingly strong reading, economists point out that the Fed will dig deeper into the report and focus on a slowdown in growth in what’s called final demand.

It grew at just 1.3% in the March quarter, the weakest rate of growth since the June quarter of 2013 and half the 2.6% rate reported for the December quarter.

That outcome will reassure the Fed that its move away from more rate rises to a wait and see stance was the right one.

Economists also point out that the growth surge came off the back of a positive contribution from trade, and the biggest rise in US business inventories in nearly two years and that build up in stocks will be run down in coming quarters, detracting from growth.

Consumer spending also slowed in the first quarter – economists said that was part of the impact of the long government shutdown through much of January.

The trade war with China, Canada and Mexico and higher exports of crude oil saw exports rise and imports fall in the quarter (final trade data and the current account for the quarter are yet to be released which will give a better idea of the GDP performance). Trade contributed 1.03 percentage points to GDP in the quarter after no contribution in the December quarter.

Economists said inventories rose at the fastest annual rate since the second quarter of 2015 Part of the inventory build was because of weak demand as consumer spending slowed in the quarter, especially in the automotive sector, which will weigh on future production at factories.

Inventories contributed 0.65 percentage point to first-quarter GDP after adding 0.10 of a percentage point in the three months to December period.

Growth in consumer spending, which accounts for more than two-thirds of US economic activity, slowed to a 1.2% rate down from the 2.5% seen in the 4th quarter. It was the slowest rate of growth in consumer sending for a year.

The slowing rate of spending was due to a 35-day shutdown of the federal government. There was also a slowdown in spending on services in the quarter.

That, however, saw spending by state and local government rise 3.9% in the quarter from 1.3% in the December quarter and was the fastest rate of growth for three years.

Business investment slowed (a surprise) a slowish 2.7% gain, down from a 5.4% gain in the prior quarter. Investment in structures fell 0.8%, the third straight decline.

Investment in new housing was another weak spot with residential investment dropping 2.8%, the fifth straight quarterly decline.

Headline inflation, as measured by the personal consumption expenditure price index (favored by the Fed), fell to a 1.4% annual rate in the first quarter from 1.9% in the three months to December. The decline in core PCE inflation was less pronounced, slipping to 1.7% from 1.9%. That is very similar to what is happening in Australia.

Glenn Dyer

About Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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