United States: Hopes of early reflation run aground as economy expands at slowest pace in three years
April 28, 2017
GDP expanded at a seasonally-adjusted annualized rate (SAAR) of 0.7% in the first quarter of the year, according to a first estimate released by the Bureau of Economic Analysis (BEA) on 28 April. The reading spells bad news for President Donald Trump and his promises to quickly deliver a boost to the U.S. economy, with consumer spending growth coming in at its lowest since December 2009. A slippage in private consumption drove growth well below the 2.1% expansion seen in Q4 and confounded market analysts that had foreseen a smaller drop to 1.1%. A year-on-year comparison showed that GDP increased 1.9% in the first quarter of 2017, which was only a notch below the previous quarter’s 2.0% expansion.
The dismal performance among U.S. households should fool no one, however. The perceived weakness was largely associated with seasonal and one-off effects, including a sharp contraction in vehicle sales in Q1 after neck-breaking growth in H2 2016 and the effects on utilities and heating spending of a milder-than-usual winter. As a result, growth in private consumption, the mainstay of the U.S. economy, abruptly decelerated from a robust 3.5% expansion in the final quarter of last year to a meagre 0.3% increase in Q1, an over-seven year low. With an outstandingly strong labor market and robust wage growth, private consumption is likely to have bottomed out this quarter. Public spending also took a hit in Q1, with lower defense spending—quite the irony considering Trump’s rhetoric on this issue—largely driving the result.
Conversely, capital outlays soared in Q1 on the heels of upbeat consumer and business confidence. At 13.7%, residential investment posted a second consecutive quarter of buoyant growth. Nonresidential investment, which had been subdued in recent months, leaped to a 9.4% expansion in Q1 on the back of structures and equipment investment showing unusual strength. All in all, fixed investment accelerated to a 10.4% increase in Q1—a five year high—from a 2.9% expansion in the previous quarter. Finally, a downswing in inventories subtracted 0.9 points from growth in what was no more than payback after Q4’s 1.0 point positive contribution.
Other than investment, the bright spot in this quarter’s report was the performance of the external sector. A pickup in global demand and a more stable U.S. dollar compared to Q4 allowed for higher volumes of exports in the first quarter of the year. Exports growth was 5.8% in the January-to-March period, a substantial upswing from last quarter’s 4.5% drop. Aided by a deceleration in imports growth (Q4 2016: +8.9% SAAR; Q1 2017: +4.1% SAAR), the net contribution of the external sector to overall growth swung from a negative 1.8 percentage points in the fourth quarter to a 0.1 percentage-point contribution in Q1.
Despite the deceleration in the economy being larger than anticipated, early signs had already hinted towards a mediocre performance of the U.S. economy in the first quarter of the year. Nonetheless, several tailwinds remain in place, with strong employment levels, buoyant business and consumer sentiment and a robust real estate sector all buttressing growth. Although growth-inducing policies from Washington are unlikely to have a direct effect on growth in Q2, the passing of these could still prompt a surge in Keynesian ‘animal spirits’.
Author: David Ampudia, Economist