GDP stronger than expected
Bottom line Gross domestic product (GDP) grew by a surprisingly stronger-than-expected annualized pace of 2.3% in the first quarter of 2018, representing the best first-quarter growth in three years. The Commerce Department’s flash report this morning showed that solid inventory restocking and positive net trade paced the strength, reversing negative fourth-quarter trends in both of these categories. Housing was breakeven to start the new year. While positive, consumer and government spending and business fixed investment were all sequentially slower.
We expect the first-quarter’s ongoing residual seasonality problem will persist in 2018, as the first quarter has been the weakest period of the year in six of the previous nine years. In addition, today’s release likely will be revised higher over the next two months, in our view, because the trends in both consumer spending and trade appear to be firming in March, while the flash report is largely constructed from January and February data.
From the S&P 500’s recent bottom on April 2, stocks have appreciated nearly 5% over the past month. We believe that the combination of today’s solid GDP report and first-quarter corporate earnings to date—which have soared more than 26% year-over-year, with nearly 80% of companies beating consensus estimates by an average of 8.4%—should continue to drive stocks higher by a like amount over the next month or so.
Above consensus results The Blue Chip consensus estimate for the first quarter was at 2.1%, while the Bloomberg consensus and the Atlanta Fed’s “GDPNow” estimate were both at 2%. We had a more constructive 2.5% estimate here at Federated, a level which we continue to believe will be achieved on revision over the next two months. We expect a rebound to 3.4% in the second quarter (versus consensus at 3.1%), based upon payment of the delayed tax refunds and more seasonable weather, after another brutal winter.
Consumer spending soft Personal consumption expenditures (which account for 70% of GDP) rose by an in-line 1.1% in the first quarter, which was the weakest period since the second quarter of 2013, compared with a much-stronger 4% gain in the fourth quarter, paced by the best Christmas in five years. Today’s gain added 0.73 percentage points to overall first-quarter GDP growth.
Retail sales suffered nominal declines of 0.1% in January and February 2018, as the personal savings rate had fallen to only 2.4% in December 2017 (its lowest level of the past year), down from 4.1% in February 2017. So consumers reduced spending to begin to repair their balance sheets and to boost the personal savings rate back up to 3.4% in February. Retail sales in March rose by a relatively strong 0.6%, as autos and housing are starting to emerge from their winter thaw, a positive trend we expect to continue into April.
Inventory accumulation accelerates Inventories more than doubled in the first quarter of 2018 to $33.1 billion versus an upwardly revised $15.6 billion in the fourth quarter of 2017, which was down sharply from the $38.5 billion added in the third quarter. That added 0.43 percentage points to GDP growth. We expect this positive trend to continue, as the economy rebounds in the second quarter of this year.
Net trade improves The dollar had lost nearly 22% of its value versus the euro over the past year (from 1.03 to 1.256), and in conjunction with solid overseas demand, exports rose 4.8% in the first quarter of 2018, versus a 7% gain in the fourth quarter, adding 0.59 percentage points to GDP growth. Imports rose 2.6% in the first quarter, down sharply from a 14.1% gain in the fourth quarter, which subtracted 0.39 percentage points from first quarter GDP. So net exports declined by $645.9 billion in the first quarter versus $653.9 billion in the fourth quarter, which added 0.20 percentage points to GDP.
Housing flat Amid a tough winter, housing broke even in the first quarter of 2018 versus a strong 12.8% gain in the fourth quarter, adding nothing to GDP. Housing is beginning to perk up in March, and we expect a strong seasonal revival in the second quarter, which will help to fuel our expected GDP rebound.
Government spending rises Total government spending, which accounts for about 17% of total U.S. GDP, rose by 1.2% in the first quarter of 2018 versus a 3% gain in the fourth quarter, adding 0.20 percentage points to GDP. Federal government spending rose 1.7%, while state and local spending rose 0.8%.
Business fixed investment rises Nonresidential real business fixed investment rose for the eighth consecutive quarter by 6.1% in the first quarter of 2018 versus a 6.8% gain in the fourth quarter, which added 0.76 percentage points to GDP. Looking at the key subcomponents, structures nearly doubled to a gain of 12.3% in the first quarter versus a 6.3% increase in the fourth quarter. Business equipment and software rose for the sixth consecutive quarter, rising 4.7% in the first quarter, compared with an 11.6% increase in the fourth quarter. Intellectual property quadrupled to a gain of 3.6% in the first quarter versus a muted 0.8% gain in the fourth quarter.