The final estimate of first quarter GDP revealed that the U.S. economy grew at a 3.1% quarter-over-quarter pace to open the year, consistent with the previous estimate and broadly in line with expectations.
The story remains largely unchanged. Headline growth was robust, but the underpinnings for that growth were not as strong as a 3-point plus growth rate would suggest.
Of particular concern was the outright weakness in the consumer sector, where spending growth slowed to just 0.9%. That marked deterioration mirrors the first quarter of 2018, where consumer spending on goods contracted outright and spending on services slowed. Spending data for the second quarter will be critical to establishing whether the slowdown represents a more protracted retrenchment in consumer spending or simply reflected a post-holiday-season breather.
Prior reports indicated that a sizable chunk of first quarter growth was directly linked to a buildup in inventories and choppy trade flows. The combination accounted for about half of the 3.1% advance for the quarter; neither is likely to continue to be a meaningful tailwind going forward. If anything, it’s more likely that they will create an additional hurdle for the economy in the months ahead.
Inventory buildup has accounted for about 1 percentage point of growth per quarter since the middle of 2018, much of which has been attributed to uncertainty around trade and businesses taking steps to mitigate the cost of tariffs and supply chain disruptions. That provided a short-term boost to growth figures, but created a bigger stockpile that will need to be worked down over time.
Switching gears, jobless claims increased moderately to 227,000 for the week ended June 22, up from 217,000 in the preceding week. The four-week moving average also edged higher. Coming on the heels of the surprisingly poor jobs report for May, the claims numbers merit closer attention. Still, even with layoffs modestly increasing, they remain in line with the level of a year ago. Job creation may be slowing, but employers do not appear to be trimming their payrolls more aggressively.
The June jobs report will be one to watch. Continued weakness in the pace of job creation would weigh on consumer sentiment, raise a red flag over the outlook for consumer spending, and be a warning sign for second quarter GDP.
For now, however, the economy appears to be settling back into a slower growth pace as the tax-cut induced sugar-high from early last year fades. Downside risk has increased, but the economy still appears to be positioned for continued growth.
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