First Look at GDP Growth in the First Quarter – Investment Up (Except Inventories), Consumption Down

Economic activity slowed in the first quarter, GDP growth dropped to a 0.7% seasonally adjusted annual rate from a 2.1% rate in the fourth quarter. The main culprits in the slowdown were personal consumption expenditures (PCE) and inventory investment.

The Bureau of Economic Analysis (BEA) released the “advance” estimate of real GDP growth in the first quarter of 2017. Despite a long awaited rebound in nonresidential fixed investment spending, sharp declines in PCE growth, mainly motor vehicle sales and residential utilities (warm winter), and the pace of inventory investment (restocking shelves more slowly), subtracted substantially from growth.

The slowdown in vehicle sales and utilities combined for a 0.74 percentage point subtraction from growth. As a result, PCE grew at an annual pace of 0.3% compared to 2.7% in all of 2016. The slowdown in inventory investment subtracted another 0.9 percentage point from GDP growth.

Vehicle sales had been elevated in 2015 and 2016 so the decline from nearly 18 million units annually to roughly 17 million should be a short-lived drag on PCE growth. And a return to more normal residential utility spending should provide a quick rebound in overall consumption spending.

On the investment side, the slowdown in inventory investment after a somewhat turbulent correction (but correction nonetheless) through 2016 should reverse and provide a boost to growth in coming quarters. An even more encouraging sign was the strong rebound in business equipment spending, which has lagged since late 2015. Strong growth in the mining exploration, shafts, and wells subsector pushed the structures component of investment to its fastest growth since the energy sector collapsed in late 2014. Growth in spending on business equipment and structures combined to add 1.0 percent point to GDP growth.

Exports rebounded and imports weakened, making trade a wash on growth, while government spending declined at both the federal as well as state and local levels. These two sectors haven’t been in recent quarters and are not expected to be engines of growth in the near term.

This quarter’s performance was poor but contains the elements for a respectable rebound next quarter. The weakness in PCE looks to be one-off and the rebound in fixed investment is the missing element we’ve been waiting for.




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