If you set out on Friday to find (more) confirmation bias for a “cleanest dirty shirt” take on the US economy, you arguably found it in one of the more closely-watched GDP reports in recent memory.
The advance read on Q1 GDP shows the US economy expanded at a 3.2% annualized pace, outstripping consensus (2.3%) by a country mile. The range (from 72 economists) was 1%-2.9%.
Note we included an “arguably” qualifier above. Some 1.68% of the headline figure was attributable to inventories and net exports (itself a reflection of a slowdown in imports). That’s the largest combined contribution for the two categories since 2013.
Consumer spending, on the other hand, rose just 1.2%, while nonresidential fixed investment rose 2.7% in 1Q (versus 5.4% in the previous quarter). Final sales to private domestic purchasers printed just 1.3% – the most sluggish since 2013.
In other words, it’s not clear how “strong” this really was. Here, we’ll let the BEA ‘splain it to you:
The acceleration in real GDP growth in the first quarter reflected an upturn in state and local government spending, accelerations in private inventory investment and in exports, and a smaller decrease in residential investment. These movements were partly offset by decelerations in PCE and nonresidential fixed investment, and a downturn in federal government spending. Imports, which are a subtraction in the calculation of GDP, turned down.
Apparently, the shutdown drag was 0.3ppt and it’s worth noting that the data for this report was incomplete thanks to that same shutdown (the longest in modern history).
Although it’s easy to poke holes in this release, that won’t deter Donald Trump from touting it which, as ever, is supremely ironic given his penchant for insisting on a return to emergency monetary policy. Earlier this month, he told reporters that the Fed should restart QE, for instance.
The president has variously assailed Jerome Powell and the Fed for holding back the economy and last month, during an interview with Maria Bartiromo, he claimed that growth would be pushing 4% were it not for rate hikes and QT.
A moderation in core PCE to 1.3% (from 1.8% previously) potentially gives the Fed more scope to be “patient” (read: dovish) in the course of pacifying the man in the Oval Office. That dovish lean may well prolong the expansion, which is set to become the longest in history in July.
But cutting rates (as Trump, Kudlow and Mike Pence have not-so-gently suggested) would come across as wholly bizarre with unemployment where it is and the economy still performing optically well – especially by comparison to Europe and other locales where growth has flatlined (or worse).
Whatever happens at the Fed, it seems far-fetched to believe that Trump will ever be able to boast that he’s delivered on his pseudo-promise of keeping GDP running at 3% on a sustainable basis. You’re reminded that last year, Trump held a farcical press conference on the White House lawn to celebrate a quarterly print that exceeded 4%, as though the economic renaissance had indeed arrived. Fast forward 9 months and things are going well, but not great (“again”).
Trump’s laughable budget (see here) included a set of entirely unrealistic economic projections. Specifically, the budget assumes the economy grows at an average 3% annual rate over the next decade (3.2% in 2019, 3.1% in 2020 and 3% in 2021). That isn’t even close to realistic. Here are two handy charts from Goldman which show you just how far out of whack those figures are with Wall Street’s projections:
(Goldman)
In any event, the dollar – which is riding a hot streak thanks in part to the US economy’s relative resilience compared to the rest of the world, which continues to stumble, “green shoots” notwithstanding – pared all knee-jerk gains from the GDP numbers, probably on the realization that no matter how hard the Fed tries, the remainder of the year is going to be challenging as the fiscal boost wanes.
If you took the poison out, I might be able to take this analysis seriously. As it is, it comes off as disingenuous.