Economic Growth Beats Expectations But Isn’t Much To Write Home About
First quarter economic growth came in higher than expected, but there are several caveats worth keeping an eye on.
The first report on economic growth in the first quarter of 2019 shows somewhat of a rebound from the disappointing numbers we saw for the final quarter of 2019, although those numbers are largely consistent with what we saw in the final years of the Obama Administration:
Real gross domestic product (GDP) increased at an annual rate of 3.2 percent in the first quarter of 2019 (table 1), according to the “advance” estimate released by the Bureau of Economic Analysis. In the fourth quarter of 2018, real GDP increased 2.2 percent.
The Bureau’s first-quarter advance estimate released today is based on source data that are incomplete or subject to further revision by the source agency (see “Source Data for the Advance Estimate” on page 2). The “second” estimate for the first quarter, based on more complete data, will be released on May 30, 2019.
The acceleration in real GDP growth in the first quarter reflected an upturn in state and local government spending, accelerations in private inventory investment and in exports, and a smaller decrease in residential investment. These movements were partly offset by decelerations in PCE and nonresidential fixed investment, and a downturn in federal government spending. Imports, which are a subtraction in the calculation of GDP, turned down.
Current dollar GDP increased 3.8 percent, or $197.6 billion, in the first quarter to a level of $21.06 trillion. In the fourth quarter, current-dollar GDP increased 4.1 percent, or $206.9 billion (table 1 and table 3).
The price index for gross domestic purchases increased 0.8 percent in the first quarter, compared with an increase of 1.7 percent in the fourth quarter (table 4). The PCE price index increased 0.6 percent, compared with an increase of 1.5 percent. Excluding food and energy prices, the PCE price index increased 1.3 percent, compared with an increase of 1.8 percent.
As this chart from the Bureau of Economic Analysis shows, these numbers. while better than what analysts were expecting are largely consistent with the numbers we’ve seen going back three years now. which suggests that the economic recovery. while still going strong, is at a level of maturity such that we have settled into a period where economic growth is likely to stay within the same range for the time being:
It should be noted, of course, that the number released today is merely an initial estimate of economic growth in the first quarter and is based on incomplete data. One thing that is notable about these numbers is that they appear to have broken a trend under which first-quarter economic growth has been anemic at best and utterly disappointing at worst. In many respects. this has been due to the fact that harsh winter weather during the first quarter has had a negative impact on growth due to manner in which it discourages consumer spending and hampers business activity. For the most part, though. the winter this year was relatively mild in most sections of the country, with only a smattering of storms that had anything other than a minor impact on communities. That is likely one reason why the trend was broken this time.
It should also be noted that there are some caveats in this report worth keeping in mind. Notwithstanding the fact that economic growth was higher than in the final quarter of 2018. personal income during the first three months of the year did not increase as much as it did during the final three months of last year. The same is true of disposable income and consumer spending, both of which were down in the first quarter after hitting impressive numbers in the final six months of 2018.
For the most part, the better than expected GDP numbers were driven by two factors, both of which could be substantially impacted by policies out of Washington over the coming months. Imports into the United States fell by nearly 4%, for example. while exports increased by roughly the same amount. Additionally, there was strong growth in business investment and in business sales. The trade area is of particular interest, of course, because the Administration’s trade policies, including the ongoing effort to resolve the trade war with China, are still up in the air and the outcome of those negotiations with Beijing will undoubtedly have a huge impact on trade numbers and business and consumer spending in the future. Additionally, if consumer spending continues to drop then one can expect that trade numbers will also drop along with them.
Rumors of the economic expansion’s death appear to have been greatly exaggerated.
Gross domestic product, the broadest measure of goods and services produced in the economy, rose at a 3.2 percent annual rate in the first three months of the year, the Commerce Department said Friday. That is significantly better than most economists expected, and far better than the dour forecasts of early this year, when many forecast a near stall in growth. (Friday’s figures are preliminary and will be revised at least twice in the months ahead.)
Economists warned that the report was inflated by short-term factors and probably overstated the underlying pace of growth. Most anticipate a downshift as the year progresses, and hardly any independent economists expect that President Trump will be able to deliver the 3 percent growth he has promised this year.
Still, after a rough winter, the economy appears to have entered the spring fundamentally intact. Stock-market turmoil, a partial government shutdown and a crippling “polar vortex” failed to bring the decade-long recovery to an end. And with the job market still strong and consumers confident, fears of a recession appear to have been set aside.
“The angst has settled, and the economy has come back,” said Ben Herzon, an economist with Macroeconomic Advisers, a forecasting firm. “I just can’t point to anything now that’s going to push us into recession.”
Casselman also notes that these numbers are likely a boost for the Trump Administration:
The unexpectedly strong report is good news for Mr. Trump, who has often treated G.D.P. — along with the stock market, the trade deficit and other economic indicators — as a sort of personal scorecard. Late last year, that scorecard wasn’t looking good for Mr. Trump, as growth slowed, the trade deficit ballooned and the stock market plunged.
Now, however, the trade deficit has narrowed, stock indexes are setting new highs and G.D.P. defied predictions of a stall. The job market, too, rebounded quickly from a February hiccup. Some of those trends may be temporary, but the reckoning has been delayed for now.
“We’re knocking it out of the park,” Mr. Trump told reporters as he left the White House Friday morning for an event in Indianapolis.
Friday’s report could also lead Mr. Trump to ease his pressure on the Federal Reserve, which he has recently criticized for failing to do enough to support the economy.
At the same time, he also takes note of warning signs for the future:
The first-quarter growth figure was inflated by a buildup of inventories and by a steep decline in imports. Both trends are likely to reverse in the second quarter. (Imports count as a negative in G.D.P. accounting, so a decline in imports makes growth look stronger. Exports, which add to G.D.P., rose significantly.)
For a better gauge of the economy’s strength, analysts recommend focusing on a different number, which strips out trade and inventory effects as well as the impact of government spending. That measure, known as final private sales, came in at 1.3 percent, down from 2.6 percent in the fourth quarter of 2018 and the weakest showing since 2013.
Next quarter, the pattern could reverse: Inventories are likely to shrink and imports to grow, pushing down overall G.D.P. growth even if the underlying economy is essentially unchanged.
“Given the backdrop of weak global trade, it would be amazing if net trade were to continue to add to G.D.P. as the year goes on,” said Paul Ashworth, chief United States economist for Capital Economics.
The Washington Post, meanwhile, emphasizes what it clearly seems to see as good news:
The U.S. economy expanded at a strong 3.2 percent annualized rate from January through March, the U.S. Commerce Department said Friday, mainly because of companies beefing up their inventories and a smaller trade deficit, factors that aren’t expected to last.
Better-than-expected growth, the ongoing strength in the job market and fresh stock market highs this week are allaying fears that a recession or severe downturn is on the horizon.
Many economists initially predicted anemic growth at the start of 2019 as the partial government shutdown and a rash of extremely cold weather caused many businesses and consumers to hit the pause button on big purchases, but forecasters raised their estimates to 2.3 percent as it became clear companies were re-stocking their shelves. Growth ended up coming in almost a full percentage point higher than expected, the best start to the year since 2015.
Over half of the strong first quarter growth was driven by a surge in inventories and U.S. exports to other nations. State and local government spending also boosted growth by the biggest amount in three years.
“Businesses were building inventories like crazy. That is not going to last,” said Ben Herzon, executive director at Marcoeconomic Advisers. “The first-quarter number is overstating the strength of the economy.”
Most experts, including the Federal Reserve, which has been a frequent target of Trump’s ire, have been saying growth is likely to come in closer to 2 percent this year, more in line with the Obama years. But some independent forecasters are moving their estimates toward 2.5 percent as they see an improving outlook.
The International Monetary Fund recently predicted growth would pick up in the second half of the year for the world economy and likely the United States, propelled by the expected resolution of the U.S.-China trade war and the Fed’s decision to hold off on raising interest rates.
The president’s top economic advisers say they are revising their forecasts even higher for the year after looking through the data. They believe growth would have been 3.5 percent in the first quarter without the shutdown and that consumption will pick up later this year.
“Right now we would be inclined to increase our forecasts. Not only was last year not a sugar high, but it appears the economy is accelerating,” said Kevin Hassett, head of Trump’s Council of Economic Advisers.
A key conundrum is that first quarter growth is typically the weakest of the year, but this year is likely to be different, experts say.
After a big buying spree in the winter, companies are unlikely to keep expanding their inventory this spring, meaning second-quarter growth could take a hit. The unusual jump in U.S. exports is also likely to be hard to sustain. If the trade deficit widens in the second quarter, that would also be a drag on growth.
Business spending, which the White House said the tax cuts would boost, came in at 2.7 percent, a modest pace with almost not spending on equipment or buildings. There’s hope that if Trump ends the trade war with China soon, businesses might be more eager to spend again
“There’s no evidence that business investment has ratcheted up to a new higher level as a result of tax reform,” said Dean Maki, chief economist at Point72 Asset Management. “Still, it has been relatively steady.”
As a political matter the Trump Administration and Republicans will tout these numbers as a sign that their policies are working, but that is hardly a decisive factor at this early stage and may turn out to be meaningless as we get closer to the election. As noted, both the Federal Reserve and other analysts expect that the economy will slow down as we get closer to 2020. It’s at that point that numbers like this will begin to matter politically, and while it doesn’t look for now as if we’ll be entering a recession, it does appear that the current recovery, which now stands at 118 months, just two months short of the 120 month recovery that lasted from 1991 through 2001, is in a stage of maturity that makes massively strong growth unlikely and makes the risks of a downturn greater. In that case, Republicans concentrating on the state of the economy could end up exposing themselves if things are weaker in the final months of the 2020 election cycle than they are hoping.