Real GDP rose at a 2.3% annual rate in the advance estimate for the first quarter, a bit stronger than anticipated (the median forecast was +2.0%), but “close enough for government work.” These figures will be revised, but the underlying story is unlikely to change much. As was widely expected, consumer spending growth slowed significantly, but that followed a strong gain in 4Q17 and investors are already looking ahead to a pickup in 2Q18. The Employment Cost Index, the preferred measure of labor costs, rose more than expected in the three months ending in March, with even stronger gains for private-sector workers. The pace is still moderate by historical standards, but the trend is higher – something the Fed will notice.
The initial estimate of first quarter growth was close to expectations, but there were a few surprises among the details. As anticipated, consumer spending growth slowed (restraining the headline GDP growth figure) and inventories rose at a faster pace (adding to GDP growth). Business fixed investment rose more than expected, slowing only a little from the fourth quarter’s pace. That was a contrast to the moderation seen in the monthly shipments data on nondefense capital goods. Mining structures (which include energy exploration) accounted for more than a fifth of the increase in nominal business fixed investment in 1Q18. The trade deficit narrowed slightly in the first quarter, rather than widening as expected – a small addition to growth, rather than a small subtraction.
Consumer spending, which accounts for 69% of GDP, rose at a 1.1% annual rate (inflation-adjusted) in 1Q18. That followed a +4.0% pace in 4Q18. The average of the two quarters was a 2.5% annual rate (up 2.6% y/y). Real disposable income rose at a 0.9% annual rate in the second half of 2017 (consistent with the soft 1Q18 spending figure), but rose at a 3.4% pace in the initial estimate for 1Q18 (consistent with 2Q improvement).
The Employment Cost Index is the preferred gauge of labor costs. Average hourly earnings can be distorted by changes in the composition of employment (for example, faster growth in lower-paying industries). The ECI keeps the mix constant, but also include benefit costs, which account for about a quarter of labor compensation. The ECI rose 2.7% y/y in March, up 2.8% for private-sector workers. That’s not especially strong by historical standards, but the trend is higher.