Real GDP Growth in the First Quarter Improved to 0.8 Percent, but Still a Disappointing Start to Year

The Bureau of Economic Analysis said that the U.S. economy grew by 0.8 percent in the first quarter of 2016, up from the prior estimate of 0.5 percent. The revision stemmed from better fixed investment, inventories and net exports data. Nonetheless, it is clear that the economy remained challenged, with the improvements in these categories reducing the pace to which each was a drag on real GDP growth. Overall, U.S. economic growth has been disappointing through the first three months of 2016, extending the sluggishness seen at the end of 2015. Indeed, the underlying story remained the same as noted in the prior release. Consumers and businesses were cautious in the first quarter, dampening real GDP growth, and the strong U.S. dollar and struggling economies abroad meant that net exports subtracted from growth in the quarter.

We have become accustomed to having a bad first quarter following by a strong rebound in the second quarter. In 2015, for instance, first and second quarter real GDP growth was 0.6 percent and 3.9 percent, respectively. I continue to expect a rebound in the current quarter, as well, with my forecast for second quarter 2016 growth currently at 2.5 percent. For 2016 as a whole, I am predicting 2.0 percent growth.

Looking more closely at the first quarter data, consumer spending on goods was up just 0.4 percent at the annual rate, pulling back from 5.0 percent and 1.4 percent in the previous two quarters, respectively. As a result, goods spending added just 0.09 percent to real GDP growth. In contrast, service-sector spending by consumers contributed 1.20 percentage points to the headline number, making it one of the brighter spots in the latest report. The largest contributors were health care, housing and utilities, transportation services and other services.

Turning to business spending, nonresidential fixed investment fell an annualized 6.2 percent in the first quarter, extending the 2.1 percent decline seen in the fourth quarter. Spending on structures and equipment were down for the second straight quarter, with soft inventory growth serving as a drag on growth for the third consecutive report. On a more positive note, residential spending grew at an annualized 17.1 percent in the first quarter, with the housing market continuing to move in the right direction overall. As a whole, gross private domestic investment fell 2.6 percent at the annual rate in the first quarter, subtracting 0.45 percentage points from real GDP growth. That was better than the 0.45 percent drag seen in the previous estimate.

Net exports also presented a challenge, as manufacturers and other businesses struggled to increase international demand. Goods exports were 2.6 percent at the annual rate. Goods exports have fallen in four of the past five months. At the same time, goods imports were off by less, down 1.1 percent for the quarter. As a result, net exports subtracted 0.21 percentage points from top-line GDP growth in the first quarter, which was an improvement from the 0.33 percent subtraction estimated earlier.

Chad Moutray

Chad Moutray

Chad Moutray is chief economist for the National Association of Manufacturers (NAM) and the Director of the Center for Manufacturing Research for The Manufacturing Institute, where he serves as the NAM’s economic forecaster and spokesperson on economic issues. He frequently comments on current economic conditions for manufacturers through professional presentations and media interviews. He has appeared on Bloomberg, CNBC, C-SPAN, Fox Business and Fox News, among other news outlets.
Chad Moutray

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