US GDP Growth Not Quite as Strong in Q1 as Headline Suggests

Wells Fargo expects stable interest rates as economic components such as a 6-year low in growth of final domestic sales suggest underlying details weaker than overall GDP growth

U.S. real GDP grew at an annualized rate of 3.2% in Q1 2019, relative to the previous quarter, but unintentional inventory build, temporarily depressed imports and weak final sales to private domestic purchasers suggest future headwinds.
U.S. real GDP grew at an annualized rate of 3.2% in Q1 2019, relative to the previous quarter, but unintentional inventory build, temporarily depressed imports and weak final sales to private domestic purchasers suggest future headwinds.
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Wells Fargo Economics Group analysis

U.S. real GDP grew at an annualized rate of 3.2% in the first quarter of 2019 relative to the previous quarter. The headline rate of growth was not only stronger than most analysts expected, but growth also accelerated relative to the 2.2% rate measured in the fourth quarter of 2018. But the underlying details were not quite as strong as the headline growth rate suggests.

For starters, there was a sizeable build of inventoriesNet exports made one of its largest contributions to GDP growth in this cycle, but imports also fell 3.7%. Imports likely to rebound in coming quarters will exert a drag on growth.Net exports made one of its largest contributions to GDP growth in this cycle, but imports also fell 3.7%. Imports likely to rebound in coming quarters will exert a drag on growth. ($128 billion at an annualized rate), which added 0.7 percentage points to topline GDP growth. Given the lackluster rate of domestic final spending, some of this inventory build likely was unintentional. Inventory accumulation should fall back in coming quarters, which will exert a headwind on GDP growth at that time.

Second, net exports added 1.0 percentage point to the overall rate of growth, which is among the largest positive contributions this component has made in this cycle. Although exports grew at a modest rate of 3.7%, imports fell 3.7%. Given continued growth in domestic demand, real imports likely will rebound in coming quarters, which also will exert a drag on growth.

As noted, domestic demand continued to grow in the first quarter, albeit at a modest pace. Real personal consumption expenditures (PCE) rose only 1.2% in Q1, and fixed investment spending was up only 1.5%. Indeed, final sales to private domestic purchases – a measure of the domestic economy’s underlying strength – rose just 1.3%; the slowest growth of this component in nearly six years.

Final domestic spending should accelerate somewhat in coming quarters. Real PCE ended the first quarter on a strong note, which gives it momentum heading into Q2. And March durable goods orders, released yesterday, suggest that capital spending could be picking up.

Although the economy may not have been as strong in the first quarter as the headline GDP growth rate suggests, the economy is not in danger of stalling anytime soon.

In Wells Fargo’s view, the stronger-than-expectedWith the Fed’s preferred measure of consumer price inflation remaining below its objective of 2%, the FOMC is likely to remain on the sideline watching the data, rather than raising interest rates.With the Fed’s preferred measure of consumer price inflation remaining below its objective of 2%, the FOMC is likely to remain on the sideline watching the data, rather than raising interest rates. GDP print does not materially change the outlook for Fed policy, at least in the near term. That is, the Federal Open Market Committee likely will refrain from raising rates for the foreseeable future.

  • First, the underlying details were not as strong as the headline rate of GDP growth suggests.
  • Second, the core PCE deflator rose at an annualized rate of just 1.3% in the first quarter. Consequently, this measure of consumer prices was up just 1.7% compared to last year’s first quarter.

With the Fed’s preferred measure of consumer price inflation remaining below its objective of 2%, it seems likely that the FOMC will be happy to remain on the sideline watching the incoming data.

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