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Friday, April 27, 2018

1Q2018 Gross Domestic Product: First (“Advance”) Estimate

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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.

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