The Story So Far

Recent economic data suggest the overall growth was at a moderate pace in the first quarter, respectable, but short of the very lofty expectations seen at the start of the quarter. That’s not terrible. First quarter GDP has tended to be on the weak side over the last several years (exhibiting what is called “residual seasonality”) and growth is still expected to be strong in the remainder of the year. However, the level of uncertainty is high. The economic impact of the Tax Cut and Jobs Act is debatable and trade policy uncertainty isn’t helping. Moreover, the TCJA and the recent spending agreement will add to the federal budget deficit over the next several years.

Consumer spending accounts for about 69% of Gross Domestic Product. Adjusted for inflation, spending was flat in February, following a 0.2% decline in January – on track for less than a 1% annual rate in 1Q18 (assuming a likely pickup in spending for March). The first quarter softness in spending followed a strong 4Q17 (+4.0%). It’s not unusual to see some unevenness in spending across quarters. Still, inflation-adjusted wage growth for the typical worker has been weak. A moderation in gasoline prices and tighter job market conditions (implying better wage growth) ought to help change that.

Scott Brown
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Other data have been mixed. Shipments of nondefense capital goods ex-aircraft, a rough proxy for business fixed investment, rose 1.4% in February (vs. +0.1% in January) – on track for a moderate pace in 1Q18, although noticeably slower than in the second half of 2017. Inventory growth picked up in the first two months of 1Q18, which (if that holds up) will add to GDP growth (although if unintentional, that’s not good). The merchandise trade deficit widened significantly in 4Q17. The surge in imports, by itself, subtracted two percentage points from headline GDP growth. The trade deficit widened even further in the first two months of 1Q18, which suggests that net exports will subtract somewhat from GDP growth.