This is the BEA’s initial guess at the first quarter’s GDP growth rate, and it estimates output to have risen by just 0.5%, following 1.4% in the previous quarter. Real final sales (GDP less inventories) was fractionally better at 0.9%, or 2.3% annually. Real gross domestic purchases (GDP less exports plus imports) were estimated at 0.9%, following a 1.5% rise in the fourth quarter. Headline nominal GDP rose by 1.2% from 2.3%. Aggregate inflation for the entire economy, as measured by the GDP price index, was pegged at 0.7%, down from the fourth quarter’s 0.9% growth rate. Excluding food and energy, the PCE price index rose 1.9% in the quarter (annualised), which was higher than in the fourth quarter’s 1.3% growth rate.
Underlying sector growth in the quarter paints a generally weak picture of activity with personal consumption increasing by 1.9% and business investment plunging by 5.9%; this was the result of an 8.6% drop in equipment spending against a decline of 10.7% in structures investment. In terms of actual percentage-point contributions, the first-quarter change in economic activity was driven by: 1) personal consumption (1.27 percentage points), 2) residential investment (0.49 percentage points), and 3) government spending (0.20 percentage points). Meanwhile, business investment subtracted 0.76 percentage points, net exports took off 0.34 percentage points, and inventories also subtracted 0.33 percentage points.
The first quarter was a fairly lousy quarter for economic growth, with weakness being fairly broadly based across most major sectors. Furthermore, this was the second relatively weak quarter in a row, with the fourth quarter only increasing by 1.4% relative to a post-crisis historical average of 2.1%. Inventories have now been a negative contributor for three consecutive quarters, though this still does not seem to have done much to dent the inventory-to-sales ratio for manufacturing, which remains far too high. Net exports also experienced a third consecutive quarter of negative contribution, the result of the global slowdown against the strength in the dollar. Though the largest drag from business investment was related to weakness in equipment and structures investment, software investment and R&D acted to help partly offset this weakness. Consumer spending, while positive, was softer than in the previous quarter as they spent less on autos for another straight quarter and on clothing (due to the warmer weather), as well as on other goods and services. They spent more, however, on food, recreation, and household furnishings. Overall, this quarter was a big disappointment relative to the 2.5% that was expected at the start of the quarter. Consumer spending and business investment in particularly were much lower than anticipated. As far as the Fed is concerned, this shows a moderating economy and it seems doubtful it will have enough solid evidence of a rebound by June to support another rate increase by then.
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Richard de Chazal, CFA is a London-based macroeconomist covering the U.S. economy and financial markets.