1Q2017 Gross Domestic Product: Advance Estimate

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In its advance (first) estimate of 1Q2017 gross domestic product (GDP), the Bureau of Economic Analysis (BEA) pegged growth of the U.S. economy at a seasonally adjusted and annualized rate (SAAR) of +0.69% (+1.1% expected), down by roughly two-thirds (-1.39 percentage points) from 4Q2016’s +2.08%. On a year-over-year (YoY) basis, which should eliminate any residual seasonality distortions present in quarter-over-quarter (QoQ) comparisons, GDP in 1Q2017 was +1.92% relative to 1Q2016; that was marginally lower than 4Q2016’s +1.96% relative to 4Q2015.

Three of the four groupings of GDP components -- personal consumption expenditures (PCE), private domestic investment (PDI), and net exports (NetX) -- contributed to 1Q growth. Government consumption expenditures (GCE) detracted from it. 

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Broken down by components, the headline number reflected increases in business investment, exports, and housing investment that were partially offset by a big slowdown in consumer spending.

Positives:

* Business investment reflected increases in both structures and equipment, notably a significant rise in mining exploration, shafts, and wells. In fact, the contribution from commercial fixed investment was the strongest since 1Q2012

* Exports reflected an increase in nondurable industrial supplies and materials, especially petroleum. However, imports, which subtract from the headline number, also increased. On net, then, trade contributed a modest 0.1% to the 1Q headline.

Negatives:

* The biggest driver of the fall-off in GDP growth was a near stall-out in consumer spending, which rose at a SAAR of just 0.23%, the lowest increase since 2009 -- reflecting an increase in services offset by a decrease in motor vehicles and parts. Once again, the bulk of the PCE growth came from rising healthcare services, and recreational goods and vehicles.

* Growth in private inventory investment decelerated, along with federal, and state and local government spending.

Real final sales of domestic product (the BEA’s “bottom line” indicator of economic activity that excludes the influence of inventories) provided a slightly more positive perspective by growing +1.62%, up 0.55 percentage point from the 1.07% rate recorded in 4Q2016.

Also, the BEA used an inflation rate of 2.25% to arrive at its 1Q real GDP estimate. Concurrent inflation recorded by the Bureau of Labor Statistics (BLS) in its CPI-U index was 1.54%. Overestimating inflation results in correspondingly overly pessimistic growth rates; were the BEA’s “nominal” data deflated using the CPI-U, the headline GDP growth number would have been a more positive +1.41% annualized rate.

The foregoing comments represent the general economic views and analysis of Delphi Advisors, and are provided solely for the purpose of information, instruction and discourse. They do not constitute a solicitation or recommendation regarding any investment.