“Soft” vs. “Hard” Data and 1Q17 GDP Growth

Consumer spending accounts for 69% of Gross Domestic Product. Last week, the data on the household sector were mixed. The Conference Board’s Consumer Confidence Index surged to a 16-year high. Meanwhile, inflation-adjusted consumer spending has been tracking at below a 1% annual.

The Bureau of Economic Analysis reports its advance estimate of first quarter economic growth on Friday. In recent years, the National Income and Product Accounts have exhibited what’s called “residual seasonality” in 1Q growth. That is, first quarter growth has tended to be below that of the rest of the year. Investors may be willing to dismiss a soft first quarter. There are other reasons to be skeptical of soft 1Q data, but the ongoing difference between various sentiment survey results and the hard economic data add to the view that labor market constraints will limit the pace of growth in the quarters ahead.

There are regular seasonal patterns in the economy. The holiday shopping season, the school year, and the summer travel season are the most notable examples. Most economic data are seasonally adjusted. Since the Great Recession, on average, 1Q GDP growth (+1.1%) has been less than half of the 2Q-4Q pace (+2.5%). It’s possible that the severity of the recession generated a permanent change in the seasonal pattern, but if so, the government’s seasonal adjustment will adapt over time – and we may find that this residual seasonality disappears in future revisions to the national accounts.

The advance estimate of 1Q17 GDP growth is expected to be held down by a sluggish pace of consumer spending growth. Consumer spending accounts for 69% of GDP. Interestingly, there is no evidence of residual seasonality in first quarter consumer spending growth (although fourth quarter figures have tended to be above the average of the rest of the year).