Real GDP rose at a 0.7% annual rate in the advance estimate for 1Q17, below the median forecast (+1.1%). Relatively speaking, that’s not a huge forecasting error. The headline growth figure will be revised and revised and revised over the next few months. The story behind the numbers was largely as anticipated, and that shouldn’t change much from here. However, the GDP data raise some important questions about the prospects for growth in the remainder of the year.
No surprise, consumer spending growth slowed sharply in the initial estimate for the first quarter – a 0.3% annual rate (vs. +3.5% in 4Q16). A slower pace of motor vehicle sales subtracted nearly a half of a percent from overall GDP. Personal income rose moderately in 1Q17, but inflation was higher, limiting consumer purchasing power. Mild temperatures reduced home heating expenditures, which are part of consumer spending. The near-term trend in gasoline prices has been relatively flat recently, which means that real income growth should pick up. More normal temperatures should lead to an unwinding of the dip in household energy consumption. The University of Michigan’s April consumer sentiment survey results noted that, over the last two months, evaluations of current personal finances posted the strongest improvement in 15 years.
Business fixed investment surged in the first quarter (a 9.4% annual rate, vs. +0.9% in 4Q16). Consumer optimism doesn’t always translate into higher consumer spending growth. However, business investment decisions are, by necessity, forward-looking. Business structures accounted for nearly half of the first quarter surge in nonresidential fixed investment. That could have been helped by mild weather. Spending on information-processing equipment picked up. Spending on industrial equipment was moderate. Inventory growth slowed sharply, subtracting 0.9 percentage point from GDP growth.