April 30, 2018

First Quarter 2018 GDP Review (PDF)

Details

The Bureau of Economic Analysis (BEA) reported that real gross domestic product (RGDP) grew at a 2.3% annual rate^[1] in Q1-2018. Nominal GDP (NGDP), which measures total spending in the economy without adjusting for inflation, increased by 4.3%. After adjusting for 2.0% inflation—as measured by the GDP deflator—RGDP growth was 2.3%.

	Actual		Blue Chip Consensus Forecast
Component/Quarter	Q4-2017	Q1-2018	Q1-2018	Q2-2018	Q3-2018	Q4-2018
Real GDP (RGDP) growth	2.9%	2.3%	2.1%	3.1%	3.0%	2.8%
Nominal GDP (NGDP) growth	5.3%	4.3%	4.4%	5.0%	5.2%	4.9%
GDP deflator (inflation rate)	2.4%	2.0%	2.3%	1.9%	2.2%	2.1%

Consumer spending contributed +0.73 (+1.66^[2]) percentage points to the measured RGDP growth rate of 2.3 percent. Business non-residential fixed investment, which excludes inventories, contributed +0.75 (+0.54) percentage points. Residential investment did not contribute or subtract from growth (+0.17), while business inventory investment added 0.43 (+0.20) percentage points. Increased federal government spending (mostly in defense) added +011 (-0.07) percentage points, while spending by state and local governments contributed +0.09 (-0.07) percentage points. Net exports added +0.20 (-0.20) percentage points from RGDP growth.

First Quarter Economic Indicators	Jan-18	Feb-18	Mar-18
ISM Manufacturing Index (>50, expansion)	59.1	60.8	59.3
ISM Non-Manufacturing Index	59.9	59.5	58.8
U.S. Trade Balance (millions)	-56,665	-57,591	#N/A
Retail Sales	-0.2%	-0.1%	0.6%
Business Inventory-to-Sales Ratio	1.35	1.35	#N/A
Housing Starts	10.9%	-3.3%	1.9%
Durable Goods Orders	-3.6%	3.5%	2.6%
Personal Income	0.4%	0.4%	#N/A
Personal Outlays	0.1%	0.2%	#N/A
Nonfarm Payroll Job Growth	176,000	326,000	103,000
Private Payroll Job Growth	188,000	320,000	102,000
PCE Inflation (12-month change)	1.7%	1.8%	#N/A
Core PCE Inflation (12-month change)	1.5%	1.6%	#N/A
Consumer Confidence	124.3	130.0	127.0

Context

Since the last recession’s end, Q1 RGDP growth has been unusually soft, averaging only 1.2%. Forecasters anticipated 2.1% growth. Thus, the reported 2.3% RGDP growth was a very positive result. Furthermore, given the general softness of Q1 numbers, nonresidential business fixed investment was robust, contributing 0.75 percentage points to growth.

The personal consumption expenditures (PCE) price index—the Fed’s main inflation indicator—rose to an annualized rate of 2.5% net of energy and food prices. In its 2018 annual report (p. 86) JEC Republicans suggested a near-term acceleration of inflation was likely. We continue to anticipate that inflationary pressures should abate in the long term as supply-side effects of tax and regulatory reform gain more traction. Overall, the inflation picture gives no cause for concern. The GDP deflator registered an annualized growth rate of only 2.0% (compared to the 2.3% anticipated by forecasters). Year-over-year, which is the typical way inflation numbers are reported, the PCE price index excluding food and energy prices is up only 1.7% and the GDP deflator 1.9%.

Furthermore, real disposable personal income (inflation-adjusted household incomes after deducting taxes) grew 3.4% in Q1, reflecting both higher wages and lower taxes through the Tax Cuts and Jobs Act (TCJA). In comparison, growth during the Obama Administration after the recession averaged only 1.9%.

Noteworthy

Two updates to BEA’s initial GDP report are scheduled for May 30 and June 28. The Q2-2018 GDP report is scheduled for July 27 at 8:30am, in which BEA will release its comprehensive revisions, which will affect data going back to 1929. In addition, the real estimates will be converted from 2009 dollars to 2012 dollars.