Right, so earlier today we got the first read on Q1 GDP and it wasn’t… err… it wasn’t great.
In fact, the economy expanded at the slowest pace in three years and consumer spending (which, like Ron Burgundy, is “kind of a big deal”), rose just 0.3%, the worst performance since 2009.
The knee-jerk market reaction was, to some, counterintuitive. USDJPY jumped with Treasury yields. As we were quick to note (and as reflected in the post linked above) the explanation was simple:
Think: largest increase in Employment Cost Index since Q1 2007.
Since then, we’ve given some of it back as reality set in…
Well, if you were wondering what BofAML thinks, Michelle Meyer’s out with a simple assessment: this “product” is “grossly” distorted by the infamous “residual seasonality” (a.k.a. data shark-jumping).
You can read her Friday note below:
Q1 GDP: Grossly Distorted Product
The economy expanded at a sluggish 0.7% qoq saar rate in 1Q. While this was clearly a weak showing, it was fairly consistent with expectations (consensus: 1.0%; BofaML: 0.8%) given the pattern over the past several years of depressed 1Q growth. This reflects “residual seasonality” where the BEA struggles to appropriately seasonally adjust the data at the start of the year, thereby redistributing growth from 1Q to 2Q/3Q. Within the components, there was particular weakness in consumer spending, government spending and inventories which was offset by impressive growth in both nonresidential and residential investment. We think the momentum in investment should lend itself to further growth in 2Q which will be coupled with a recovery in consumption, prompting a solid performance for the quarter.
Consumer spending only increased 0.3% qoq saar, the weakest growth rate since 4Q 2009. This reflected a decline in durable goods (-2.5%) as auto sales got off to a weak start in 2017. Services spend was also up only 0.4% likely reflecting decreased home heating demand given warmer-than-normal temperatures. In addition, delayed tax refunds were likely a negative factor, though this should support a 2Q rebound. Smoothing through the last four quarters, consumer spending is running at 2.8% on average, which represents a healthy underlying pace that we believe will continue for the remainder of the year. Inventories were another drag to 1Q growth, slicing 0.9pp but setting up for more stockpiling in 2Q. And government spending declined 1.7% owing to defense cuts, though this category is vulnerable to residual seasonality issues.
On the upside, investment was quite robust with nonresidential structures investment up 22.1% and equipment up 9.1%, which is a decisive turn higher given the weak trajectory over the past several quarters. Residential investment was also strong, increasing 13.7% given the solid rise in housing starts and sales to start the year. But warm weather could have pulled forward housing activity from the spring months.
Bottom line: the guts within the GDP report were stronger than the headline implies, likely setting up for stronger growth into 2Q and 3Q. This leaves us comfortable with our forecast of low-2% average growth this year, accelerating from 1.6% in 2016.
Whatever, right? Sounds like a lot of gerrymandering to us.
Oh – and this is important – amid the consumer spending malaise, there was one bright spot: RVs...
Some folks out there seem to have been caught off guard by the strong showing for recreational vehicles or seem to think it’s somehow indicative of a problem.
As regular readers know, we’ve been long RVs since day one…