Tony Kelly, Senior Economist at NAB, explains that sluggish March quarter GDP growth suggests the US economy got off to a slow start in 2017 but the March quarter weakness is not uncommon and business surveys and consumer confidence remain solid.
“March quarter 2017 US GDP grew by just 0.2% mom, or 0.7% on an annualised basis. As growth at the start of last year was similarly sluggish, the annual growth rate was only down slightly to 1.9% yoy.”
“The details for quarterly growth, while mixed, where not as bad as the headline result. On the negative side, private consumption growth slowed significantly, and government demand declined. However, while inventories also detracted from growth it does not appear to be the start of a sustained inventory correction. Moreover, a clear positive was that investment – both businesses and in housing – was strong.”
“The weak March quarter GDP outcome was broadly in line with expectations, both in terms of size and composition, so it does not fundamentally change the outlook.”
“In recent years March quarter growth has generally been much weaker than in the rest of the year. Whether just a coincidence, or due to problems with the statistician’s seasonal adjustment, is still up for debate.”
“In any event, survey measures of the economy are suggesting that it is performing better than the GDP data suggest. Business confidence is solid and consumer confidence measures show positive sentiment amongst households. Consumer expectations broadly track actual consumption over time but right now there is a significant divergence, suggesting that the March quarter weakness will prove to be only temporary.”
“The truth is probably somewhere in the middle of the survey and GDP data. This would suggest that the economy is growing modestly above trend – consistent with the ongoing decline in the unemployment rate over time we are seeing.”
“We continue to expect that the Fed will next raise rates at its June meeting. Fed members will not be surprised by the Q1 slowdown but will want to see partial indicators to soon start providing evidence that it is only temporary. The dip in March inflation also increases the risk that the Fed will go slow. However, the Fed will take comfort from the Employment Cost Index (ECI), released the same day as the March quarter GDP estimate, which recorded its strongest quarterly increase in several years, consistent with the general picture that wages growth is gradually strengthening.”