Starting with a bang
America’s strong growth this year surprises economists
But look more closely at the latest GDP figures, and they are not so Rosy
THIS YEAR America’s economy did not get the freshest of starts. A government shutdown, a wobbly stockmarket and concerns that the Federal Reserve would tighten monetary policy too quickly made for a dim outlook for 2019. With the effects of fiscal stimulus fading, and momentum in the global economy ebbing, most expected America’s economic growth to decelerate.
So GDP figures for the first quarter, published on April 26th, were a pleasant surprise. Economists surveyed by the Wall Street Journal had been expecting annualised real growth for the quarter of 2.5%. Instead they were treated to a figure of 3.2%. Needless to say, President Donald Trump was pleased, tweeting that the figure was “far above expectations or projections”, and (of course) adding “MAKE AMERICA GREAT AGAIN”.
The president got an impressive number to hurl at his critics, who had doubted that his economic plans would generate sustained rapid growth. The headline figure also seemed to defy fears of a looming downturn. Markets predict an interest-rate cut this year. But an economy growing at such a healthy clip seems, at face value, unlikely to need such support.
Dig a little deeper, though, and the details are less rosy. Around one percentage point of that 3.2% was because of falling imports and rising exports, a volatile component of GDP. Another 0.7 percentage points came from changes in inventories, which could unwind later in the year.
Some other components of GDP looked soft. Consumer spending, an engine of growth through most of last year, grew by just 1.2% on an annualised basis, or less than half its rate in the fourth quarter of 2018. It was pulled down by an 18% decline in spending on cars and car parts. Investment data also looked a little soggy, with the exception of investment in intellectual property.
Some of this weakness should reverse in the second quarter of 2019. The government shutdown probably did crimp performance, but is now over. And though retail sales went through a soft patch around the turn of the year, they seem to be picking up. And the GDP figures come with a standard caveat: they are preliminary estimates, which will be revised at least twice in the coming months.
Perhaps more consequential than the eye-catching growth figure was unexpectedly weak inflation, which could suggest an underlying weakness in demand. Annualised quarterly growth in prices, as measured by personal-consumption expenditures, was just 0.6%, or 1.3% when excluding (volatile) energy and food. This sting in the tail is probably why government bond yields, which rose on news of the cheering GDP figure, then fell sharply.
Monetary policymakers at the Fed are due to meet next week, and some may conclude from today’s release that they raised interest rates too aggressively in 2018, and are therefore to blame for disappointing domestic demand. The weakness of inflation certainly suggests that monetary policy has not been too loose. A more constructive conclusion might be that the Fed was right to shift to a more doveish stance in the past few months, and that low inflation leaves it well placed to apply more stimulus if necessary. Official projections at its last meeting suggested that interest rates would not rise again this year. With inflation still quiescent, there seems no reason that would change.
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