The economy was slightly stronger in the first quarter than previously reported, but was still nothing to write home about. At this point, however, investors are focused on data that supports an expected pickup in growth in Q2, shrugging off what was just the most recent in a lengthy string of lackluster starts to the year.
The third estimate of GDP released this morning revealed that the U.S. economy grew at a 1.4 percent quarter-over-quarter pace in the first quarter, modestly exceeding the consensus expectation for an unchanged 1.2 percent pace.
A sluggish start to the year is nothing new for the U.S. economy. Since 2000, first quarter growth has averaged just about 1 percent versus an average growth rate of 2.2 percent for the rest of the year. The underlying cause remains unexplained from an official perspective, but appears to be a persistent shortcoming in the application of seasonal adjustment factors. With that in mind, the soft Q1 growth pace should be taken with a grain of salt.
Underlying the slower headline growth was a sizable slowdown in consumer spending. After registering a robust 3.5 percent advance in Q4, consumer spending grew by a mere 1.1 percent in Q1. The unseasonably mild winter in January and February that resulted in consumers spending less on services, such as utilities and snow removal, may be partially to blame. Contracting inventories also shaved about 1.1 percent from top line growth, effectively erasing a 1.0 percent boost to Q4 growth from inventory buildup.
One bright spot was a surge in business fixed investment, as investment in structures, equipment, and intellectual property surged. The sharp post-election increase in business confidence was expected to boost capital spending, and it appears that was the case.
Strong residential construction (which grew by 13.0 percent) also likely benefited from both improving consumer sentiment and the mild winter weather.
Ultimately, today’s report is unlikely to have any meaningful impact, as it merely reinforces what was already widely understood. The economy slowed in the first quarter, largely due to a sharp slowdown in consumer spending growth. While not a positive outcome, it’s also unlikely to have legs. A combination of strong labor market conditions, growing income, and a broadly upbeat consumer mood should support stronger spending in the coming months.