The U.S. economy grew at a 3.2% real rate in the first quarter. That’s substantially stronger than the 2.2% growth in the fourth quarter and way above projections for 1.9% growth among economists surveyed by Briefing.com.
Inflation remained very subdued with the GDP Deflator showing inflation at 0.9%. Inflation by this measure was 1.7% in the fourth quarter. Economists had been expecting inflation of 1.4%. The Fed’s preferred inflation measure, Personal Consumption Expenditure, showed inflation dropping to 1.3%, well below the Fed’s 2% inflation target.
All things considered, though, the market reaction has been a loud “Meh!” As of 2 p.m. New York time the Standard & Poor’s 500 was up just 0.12% and the Dow Jones Industrial Average was ahead just 0.04%. The NASDAQ Composite had slipped 0.04%. The Russell 2000 Small Cap Index was up 0.74%. Oil prices fell on statements from President Donald Trump reporting that he had called OPEC leaders and demanded that they bring down gasoline prices. U.S. benchmark West Texas Intermediate fell 3.45% to $62.91 a barrel and international benchmark Brent crude dropped 3.71% to $71.57. The yield on the 10-year Treasury fell 3 basis points to 2.51%.
Some of that “Meh” is a result of economists throwing cold water on that 3.2% growth rate surprise. Economists have pointed out that most of the gains for the quarter came from a jump in net exports of 1.03 percentage points and a rise in inventories of 0.65 percentage points. The total from those two categories was a 1.68 percentage point addition to the GDP growth rate, the biggest boost from these sources in six years. (The increase in net exports itself came from a drop in imports.)The two problems with growth from these sources are that they’re extremely volatile–net U.S. exports could easily reverse course and drop next month–and that additions to GDP in one quarter often result in a drop in the next quarter. A rise in inventories, for example, pushes growth higher in the quarter in which it occurs but often leads to a drop in reported growth in the next quarter as companies hold back on orders in order to sell down inventories.
Economists would be much more impressed with today’s growth surge if it had been based on an increase in consumer spending and a pickup in nonresidential business investment. Unfortunately, consumer spending fell for a third straight quarter and business investment grew at the second-slowest pace since Trump took office. Consumer spending was up just 1.2%.Nothing in this report, however, disturbs the market’s belief in an impending interest rate cut from the Federal Reserve. (The Fed meets next week)
