United States: Strong headline GDP growth in Q1 masks weakening trend as private spending and investment slow
Economic growth surged in the first quarter of 2019 on the back of a positive net export contribution and a large inventory buildup, according to an advance GDP estimate released by the Bureau of Economic Analysis (BEA). Nevertheless, the strong print masked a further slowdown in private consumer spending—the economy’s core growth engine—and business fixed investment. GDP increased 3.2% in Q1 over the previous quarter in seasonally-adjusted annualized terms (SAAR), up from a downwardly revised 2.2% in Q4 2018 (previously reported: +2.6% SAAR) and vastly exceeding market expectations of 2.3%. In year-on-year terms, growth ticked up from 3.0% in Q4 to 3.2% in Q1.
One key takeaway from the Q1 print was the large contribution of net exports and inventories—1.0 and 0.7 percentage points respectively—to the headline GDP reading. This can partly be explained by the effects of the trade dispute with China. Manufacturers had started to stockpile imports in the second half of last year to beat a scheduled increase of tariffs on 1 January (which was later put on hold), leading to lower imports and higher inventories in Q1. Weak demand, notably in the automotive sector, also contributed to the inventory buildup. Overall, imports contracted 3.7% SAAR in Q1 after increasing 2.0% in Q4, while export growth picked up from Q4’s 1.8% to 3.7% on higher merchandise shipments.
Discounting these contributions, domestic demand appeared much softer than the headline print would suggest. Excluding trade and inventories, growth clocked in at just 1.4% in Q1, the lowest print since Q4 2015. Private consumption growth notably fell from 2.5% in Q4 to just 1.2% in Q1. Meanwhile, government consumption and investment rebounded from Q4’s 0.4% contraction, logging a 2.4% quarter-on-quarter increase thanks to higher state and local government spending and despite a second sharp contraction of federal nondefense spending. However, the government shutdown in January had a negative impact, estimated by the BEA at around 0.3 percentage points of GDP, on both public and private spending in the quarter, which should be compensated by a rebound effect in Q2.
Fixed investment growth was weak in the quarter, slowing from 3.1% in Q4 to 1.5% in Q1. Residential investment contracted for the fifth consecutive quarter—albeit at a softer pace than in Q4—as the housing market remained feeble. Business investment also slowed as spending on equipment stalled while investment in structures contracted for the third consecutive quarter. On the flipside, investment in intellectual property products such as software and patents continued to show strong growth.
Turning to the outlook, growth in Q2 seems poised to tick down, but consumer spending dynamics appear to have regained some momentum at the end of Q1—as indicated notably by strong retail sales in March. In the words of Goldman Sachs analysts, “the pace of inventory accumulation and net exports both appear unsustainably high, and we expect these components to weigh on Q2 growth. At the same time, a boost from the end of the government shutdown (worth 0.4-0.5 pp) and improving consumer spending momentum argue for a pickup in domestic final sales growth”.
Lastly, as for the implications for monetary policy, the Q1 reading is likely to comfort the Fed in its plans to stand pat this year, as both the headline and core PCE price indexes—the Fed’s preferred inflation gauges—remained significantly below the Bank’s target, while softer consumption and investment dynamics indicate a cautious stance remains warranted.