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April 26, 2019 Blog 2 min read
Looking under the hood of the GDP report, the story is still good, but not as great as the 3.2% headline advance would suggest.
4-26-19 GDP chartThe economy grew at a brisk 3.2% pace in the first quarter, providing further evidence that the fears about the slowing economy that permeated the consumer mood late last year were overblown. That represented the best first quarter growth pace for the U.S. since 2015.

Looking under the hood, the story is still good, but not as great as the headline growth result would suggest.

Consumer spending decelerated meaningfully in the first quarter, a particularly noteworthy development given its significance, representing nearly two-thirds of all economic activity. Personal consumption growth slowed to about 1.2% in the first quarter, building on a trend that began in mid-2018. Consumer spending on goods actually contracted fractionally, led by a decline in vehicle sales that shaved a half point off growth.

Also noteworthy was the fifth consecutive quarter in which residential investment was fractionally negative, slipping by about 2.8%. The housing sector has now been modestly contracting for over a year.

The combination of sub-par results in both housing and vehicle sales suggest some hesitance on the part of consumers to splurge on big-ticket items, and also indicates that rising interest rates in recent year are starting to bite.

Where did the growth then come from? Most notable perhaps is the contribution from trade, with both rising exports and a declining imports playing a role. That swing alone accounted for 1.0% of the headline number, nearly a third of the Q1 advance.

A buildup in business inventories for the third consecutive quarter also added two-thirds of a point. While supportive in the near term, that is likely to turn into a headwind in the coming quarters as businesses seek to trim their excess stock.

With many layers to the GDP report, there are a few key takeaways. First, and perhaps most importantly, this should provide further reassurance that fears about the slowing economy last year were overblown. While not universally positive, most data point to an economy that is still solidly growing, despite some cracks.

Secondly, the recent decline in consumer confidence is apparent in slower spending growth since the beginning of the year. That should also pass, as the conditions that created some anxiety appear to be fading. Solid labor market conditions and better wage growth should also provide some support.

The bottom line is that the economy in the first quarter performed better than expected, but not as strongly as the headline GDP result would suggest.
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