First Quarter GDP Release

The initial release of economic activity for the first quarter came out today slightly below consensus estimates, as the U.S. economy expanded at the lowest pace in three years.  U.S. GDP rose 0.7% for the quarter versus an expectation of 1% growth, down from 2.1% growth in the Fourth Quarter 2016.  Consumer spending grew only 0.3%, as consumption fell on large purchases such as cars, and utility bills were lower due to the unseasonably warm winter.  Government spending declined but this was mainly due to a three-month hiring freeze instituted by the Federal Government.  A reduction in inventory also weighed on growth during the quarter.  These figures were offset by an increase in business investment, which grew at a 9.4% annual pace, the largest such increase since 2013.  An increase in exports also helped offset some of the weaker data, as exports grew at a 5.8% annual pace.

This economic slowdown contrasts with surveys that show both business and consumer confidence hitting multi-year highs.  In addition, temporary factors may be to blame for the weaker than expected data.  Weather tends to impact Q1 GDP figures, and the unusually warm winter resulted in lower utility use which factored into the weak consumption data. Further impacting consumption was a delay in households receiving tax refunds.  These issues are transitory and tend to go away in the second quarter.  In fact, since 2000, Q1 GDP has averaged 1% growth compared with 2.2% growth for the rest of the year.

Although the economic data for the quarter was weaker than expected, it is important to note that this is the first release and there are two revisions that will be released later in the spring.  Furthermore, we do not see this as a weakening trend that would signal a recession.  This is due to an expanding labor market and rising wages.  Wage growth has helped retail sales figures grow higher over the past six months, which is a leading economic indicator. Manufacturing production has been on the rise since last August and corporate earnings are accelerating, which are positive economic indicators.  In fact, the economy grew nearly 2% on a year-over-year basis relative to First Quarter 2016, which is in-line with the Federal Reserve’s forecast of 2.1% GDP growth for 2017.  Therefore, we expect the economy to grow at a steady pace and believe the probability of a recession is low.