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In
its advance (first) estimate of 1Q2018 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 +2.32% (2.0% expected),
down 0.56 percentage point (PP) from 4Q2017’s +2.88%.
On
a year-over-year (YoY) basis, which should eliminate any residual seasonality
distortions present in quarter-over-quarter (QoQ) comparisons, GDP in 1Q2018 was
2.86% higher than in 1Q2017; that growth rate was faster (+0.27PP) than 4Q2017’s
+2.58% relative to 4Q2016.
All
four groupings of GDP components -- personal consumption expenditures (PCE),
private domestic investment (PDI), net exports (NetX), and government
consumption expenditures (GCE) -- contributed to 1Q growth. However, line-item
details were much weaker than suggested by the headline number. For example, spending
on consumer goods actually contracted during 1Q at a 0.24% annualized rate (-1.91PP
from 4Q). Consumer spending on services also softened to a +0.97% annualized
growth rate (-0.11PP from 4Q). The overall growth rate for consumer spending
dropped by 2.02PP from 4Q -- despite the roll-out of lower tax withholding
rates during 1Q.
Weakening
growth was also seen in the commercial and governmental sectors. Relative to 4Q
the annualized growth rate for fixed commercial investment dropped by 0.55PP,
governmental spending retreated by 0.31PP, and exports were 0.24PP lower.
The
only line items that recorded improving growth were inventories (up 0.96PP from
4Q) and imports (+1.60% from 4Q). In the BEA's way of thinking, growth in these
two line items is generally indicative of weakening domestic demand; and, unfortunately,
the QoQ swing in those two line items provided essentially all of the headline
number's increase.
The
BEA’s real final sales of domestic product growth, which excludes the effect of
inventories, was reported to be +1.89%, down a substantial 1.52PP from 4Q.
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“It
can be argued that the headline number materially overstates the actual growth
rate of the US economy,” wrote Consumer Metric Institute’s Rick Davis,
“All of the BEA's three major ‘smoke and mirrors’ components seem to be in play
for 1Q2018: inventories, imports and deflators. At key economic inflection
points those three components can become closely coupled, with lagging price
discovery compounding reported inventory and import swings.
Davis’
takeaways from this report include:
--
Consumer spending for goods contracted during the quarter.
--
The annualized growth rate for overall consumer spending dropped over 2PP.
--
The growth rates for everything not inventories or imports weakened materially.
--
Although household disposable income improved (because of reduced withholding
rates in the "Tax Cuts and Jobs Act of 2017"), most of that
improvement went into increased savings. During 1Q2018 households were showing
signs of budgetary stress.
“The
U.S. economy is not quite as robust as the BEA's headline number might suggest,”
Davis concluded. “A +2.32% headline would generally be a good thing. But unfortunately,
weakening domestic demand is causing inventories to soar and imports to crash
-- which in the BEA's calculus are boosting what would otherwise be a much
weaker headline number.
“Although
upcoming revisions might tell a different story, this report painted a picture
of an economy in transition to materially lower growth.”
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.
