Friday, April 28, 2017

GDP disappoints, but don't panic...yet

Not a good Gross Domestic Product report for the first 3 months of the Trump presidency. And more concerning to me is the reason why.
rowth in consumer spending, which accounts for more than two-thirds of U.S. economic activity, braked to a 0.3 percent rate in the first quarter. That was the slowest pace since the fourth quarter of 2009 and followed the fourth quarter's robust 3.5 percent growth rate.

The near stall in consumer spending is blamed on a mild winter, which undermined demand for heating and utilities production. Higher inflation, with the reading on the personal consumption expenditures index averaging 2.4 percent - the highest since the second quarter of 2011 - also weighed on consumer spending.
That jibes with the soft retail sales figures I’d been noticing in the early part of this year, and a major part of that low consumer spending number comes from a decline in auto sales, which had been rising strongly at the end of 2016.

That drop in auto sales reduced GDP by nearly $20 billion, and 0.45% for the quarter. Oddly, on the same day that the decline in car sales was shown to hurt US GDP, General Motors came out and announced an increase in earnings nearing 35% compared to 1 year ago. Also noteworthy is that the decline in auto sales has yet to translate to auto layoffs, as auto vehicle and parts manufacturing employment went up by 3,000 in March, and rose by 2,000 for the first 3 months of 2017.

But the decline in consumer spending is concerning as GOPs at both the state and federal level continue to pass and propose wage-suppression measures that aren’t going to help people spend more of the money they have. Combine that with a real disposable income growth being cut it half (1% vs 2% in Q4 2016), the uncertainty in health care coming from Capitol Hill, and Drumpf’s general instability, and is it any wonder that people increased their savings rate from 5.5% to 5.7% in early 2017?

The positive part in the GDP report was on the “investment” side, where a massive increase in mining expenses and home construction kept allowed GDP growth to stay above zero.
Spending on mining exploration, wells and shafts surged at a record 449 percent rate after rising at a 23.7 percent pace in the fourth quarter, accounting for the rise in nonresidential structures investment.

Spending on nonresidential structures accelerated at a 22.1 percent pace in the first quarter after falling at a 1.9 percent rate in the prior period.

Investment in home building rose at a 13.7 percent rate. Exports rose at a 5.8 percent rate, outpacing the 4.1 percent rate of increase in imports. That left a smaller trade deficit, which had a neutral impact on GDP growth.
Of course, some of those stats also could scream “BUBBLE!”, particularly in housing with interest rates going up and wages not matching the sizable home price increases. And with oil prices having a sudden retreat of 8% over the last 2 weeks, you have to wonder if there’s any incentive for those companies to keep drilling and buying equipment in the near future.

These concerns aside, a few other underlying figures from the full report makes me think our economy hasn’t stalled out (yet). For example, inventories were reduced throughout Q1, taking away 0.93% from the GDP figures for that time period. Add that back, and quarterly GDP growth ends up at 1.63%, compared to a non-inventory growth level of less than 1.1% in Q4 2016.

Perhaps growth will pick up in the coming quarters, particularly if shelves need to be restocked, job losses in retail don’t spread into other parts of the economy, and gas prices stay low in the next few weeks. But as a guy who follows the Wisconsin budget closely, it’s noteworthy that in January the Legislative Fiscal Bureau was counting on 2.3% real GDP growth for 2017, and this 0.7% number for Q1 means we now need to grow at a 2.8% rate for the rest of this year to keep up. The US hasn’t averaged 2.8% growth over a year since 2005!

With an economy allegedly near full employment and consumers not willing to shell out for anything other than houses, I can’t see where that 2.8% growth might come from. Makes you wonder if those revenue estimates might not be rosy when they come out in the next week or so, especially once we get a look at the April revenues for the state. Stay tuned.

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