Friday, April 27, 2018

Even with tax cuts in place, consumption,1st Quarter GDP slows.

We got a look at the first GDP numbers under the new tax law. And it was a mixed bag with solid growth continuing, but slowing down from what we had at the end of 2017.
The U.S. economy slowed in the first quarter as consumer spending grew at its weakest pace in nearly five years, but the setback is likely temporary against the backdrop of a tightening labor market and large fiscal stimulus.

Gross domestic product increased at a 2.3 percent annual rate, the Commerce Department said in its snapshot of first-quarter GDP on Friday, also held back by a moderation in business spending on equipment and investment in home building.

The economy grew at a 2.9 percent pace in the fourth quarter. Economists polled by Reuters had forecast output rising at a 2.0 percent rate in the January-March period.
If you dig into the Bureau of Economic Analysis’ GDP report, and especially their technical note, you get some intriguing information. The technical note gives figures on how much extra money was pocketed due to the GOP’s tax cuts taking effect, and how it inflated disposable income and savings for the 1st Quarter.
Increases in the first quarter estimates of disposable personal income and the personal saving rate mostly result from a decrease in personal current taxes, which reflect the effects of the Tax Cuts and Jobs Act (TCJA). BEA estimates that the TCJA reduced personal current taxes by $115.5 billion at an annual rate. BEA’s preliminary estimates of the effects of the TCJA are based in part on projections prepared by the Treasury Department’s Office of Tax Analysis….

Wages and salaries in the first quarter were adjusted up by $10.0 billion (annualized rate) to account for bonuses that are not included in the monthly source data in the Current Employment Statistics from the Bureau of Labor Statistics. This adjustment reflects one-time bonuses paid by businesses reported publicly in response to the TCJA and was derived based on news releases covering estimates of the number of employees receiving bonuses and payment amounts. BEA will release QCEW-based estimates of wages and salaries, that will include both regular and TCJA related bonus activity, for the first quarter of 2018 on July 27.
Apparently the BEA isn’t looking into how many of those publically-announced bonuses are being offset by businesses like Kimberly-Clark who used the lower corporate tax rate to “restructure” and lay people off. Maybe they should.

James Hamilton at Econbrowser has a good explanation of today’s data, and you can see how the slowdown in consumption at the start of the year is the big culprit behind the 1st Quarter slowdown.

Hamilton also notes that the year-over-year trend for growth has gone up for each of the last 6 quarters. That figure is now at 2.8%, back toward where we were in much of 2014 and 2015.

Hamilton also directs us to this article from Bill McBride at the Calculated Risk Blog, who notes that a
hotter housing sector is also leading to higher prices.
In the GDP report, real residential investment was unchanged in Q1. But residential investment (RI) as a percent GDP actually increased in Q1! How can that be? The answer is that the price index for residential investment increased sharply in Q1 (up 8.5% annualized). The large increase in the residential investment price index follows what we are hearing from home builders - that material costs have increased sharply (the tariffs haven't helped, but other prices are up too). This hurts both builders and home buyers.
And it’s that inflation part that I think will be a risk to GDP growth in the near future. The higher deficits are already leading to higher interest rates for the 10-year Treasury and 30-year mortgages, and rising prices should make the Federal Reserve more likely to bring up rates for the short term.

If wages don’t rise to keep pace with the higher prices Americans are facing, then we have an economic imbalance growing that won’t hold. Which makes Monday’s release of spending and income numbers from the BEA all the more interesting, since those figures could be a big leading indicator as to whether our 1st Quarter slowdown was temporary, or an early sign that any “Trump Bubble Boom” that happened in 2017 is slowing down.

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