First Estimate of First Quarter Data

The Bureau of Economic Analysis (BEA) reported last Thursday that real gross domestic product (GDP) growth in the first quarter slowed significantly to an annualized 0.5%, considerably lower than the sluggish 1.4% growth in the previous quarter. This compares with the Atlanta Fed’s GDPNow forecast of 0.6% real GDP growth. Wall Street Journal expected 0.7%, and Wells Fargo expected 0.1%.

Sources: BEA, Haver Analytics, Atlanta Fed, Blue Chip, Wells Fargo Economics Group.
*Note: Post-1960 recovery average from recessions lasting longer than 6 months, excludes current recovery.

In March, the Federal Open Market Committee (FOMC) updated its median forecast for 2016 real GDP growth, lowering it from December’s projection of 2.4% to 2.2%, and lowered its 2017 estimate from 2.2% to 2.1%. On Wednesday of last week, the FOMC announced no increase in the target range for the federal funds rate, as expected.

 

Context

With growth below expectations, the United States saw a rather stagnant quarter in the beginning of 2016. Weakness in energy, exports, fixed investment and excess inventories muted overall GDP growth. Consumer spending largely propped up growth, and federal defense spending decreases and state and local government spending increases nearly cancelled each other out.

• Despite supporting GDP growth in the first quarter, consumer spending growth slowed in the first quarter. It remains unclear whether this is a temporary blip characteristic of the first quarter of the year or the start of a concerning trend.
• In addition to trimming GDP growth forecasts for 2016, many forecasters also slashed payroll job growth expectations, down to a monthly average of 185,000 from the 190,000 previously estimated.
• The St. Louis Fed acknowledges that in the aftermath of the recent recession, GDP has grown at a “considerably slower pace” than its historical 1955-2007 trend. Both GDP and GDP per capita were reportedly slower by 19 percent and 16 percent, respectively, in this recovery compared to their historical trends. The St. Louis Fed expects the annual growth rate of real GDP to slow to 2.2 percent over the next decade.

First quarter data still has two revisions to go before arriving at a final estimate. For the previous fourth quarter annualized real GDP growth, the first estimate of 0.7% was revised upward by 1.5 percentage points for a second estimate of 2.2% and was ultimately revised to 1.4% in the third and final estimate.

 

The Bigger Picture

The initial estimate of first quarter GDP affirms the slower growth for 2016 that many analysts and forecasters have come to expect against the backdrop of continued weakness in global growth and a strong dollar.

• Several experts have noted that despite sluggish economic growth in the United States, U.S. growth is a relative bright spot compared to an otherwise dreary global economy. This has perhaps led to heightened expectations for the U.S. economy to carry global momentum forward, despite the fact that current U.S. projections and existing policy barriers suggest this is infeasible. As stated in a recent Wall Street Journal article, “One big problem: The U.S. may not have enough horsepower to act as the global tow truck.”
• The IMF’s latest downgrade to global growth in April came with a subsequent warning that “financial and economic stagnation” could grip the global economy without government action to prevent a “pernicious feedback loop of fragile confidence, weaker growth, low inflation and rising debt burdens.”
• The Federal Reserve still expects to raise the target range for federal funds sometime this year. In the meantime, other major central banks continue to pursue negative interest rates in an effort to encourage bank lending, and perhaps secondarily, devalue their currencies to make their exports more competitive and possibly fuel inflation.

 

First Quarter Details

Among positive and negative contributions to GDP this quarter, the BEA release notes that:

• The growth in GDP was primarily concentrated in consumer spending on services, including household services, such as healthcare and housing and utilities. Consumer spending on durable goods, including motor vehicles, declined. Residential investment and state and local government spending also positively contributed to first quarter growth.

• Negative contributions resulted from declines in nonresidential fixed investment, particularly in oil and gas structures and communications equipment, private inventory investment with particular emphasis in manufacturing inventory investment decline, and net exports.

 

Economic Indicators

The economic data in the following table represents a sample of economic activity over the course of the first quarter. Forecast estimates for GDP growth are predicated upon these releases, as they reveal a little more about the economy with each month of new data. For some indicators, data for March has not yet been released.

 

                                                      Source: Haver Analytics.

 

Upcoming Key Releases

• The second estimate for first quarter GDP data, based on more complete data, will be released on May 27^th at 8:30am. This is also when BEA will report the estimates for gross domestic income (GDI), and the more reliable average of GDI and GDP.
• The third and final estimate for first quarter GDP data will be released on June 28^th at 8:30am.