Soft Real GDP Growth in the First Quarter

The Bureau of Economic Analysis reported that the U.S. economy grew 0.7 percent at the annual rate in the first quarter, starting 2017 off on a soft start as expected. This follows real GDP growth of 2.1 percent in the fourth quarter. Weaker consumer and inventory spending in the first quarter could explain the lower figures, with government spending also serving as a drag on the headline number.

To be fair, this is just the first estimate, so there is a chance that future revisions might show better growth, particularly if incoming data for March are better than expected. In addition, we traditionally have a sluggish first quarter followed by a strong rebound in the second quarter. My current forecast is for 2.8 percent growth in real GDP in the second quarter, with the economy expanding 2.1 percent for 2017 as a whole. Of course, these estimates might drift higher with passage of more pro-growth policies, especially in terms of the outlook later this year and into 2018.

Digging further into the data, consumer spending slowed to a near crawl in the first quarter, up just 0.3 percent at the annual rate, down from 3.5 percent growth in the fourth quarter. Durable goods spending declined 2.5 percent in this report, pulled lower by a 4.5 percent decrease in motor vehicles and parts. Spending on nondurable goods and services was also soft, up 1.5 percent and 0.4 percent, respectively. Overall, personal consumption expenditures added 0.23 percentage points to the top-line GDP growth figure.

At the same time, the business investment picture was mixed. On the bright side, nonresidential fixed investment jumped 9.4 percent, its strongest pace since the fourth quarter of 2013 and boosted by large gains in spending on structures, up 22.1 percent. In addition, residential spending accelerated for the second straight release, up 13.7 percent in the first quarter. In sum, residential and nonresidential fixed investment contributed 1.62 percentage points to headline GDP. However, reduced spending on inventories partially offset this increase, subtracting 0.93 percent. The silver lining is that better spending on inventories in the second quarter should help to propel a rebound in growth.

Meanwhile, the large drag on fourth quarter growth was net exports, with economic headwinds abroad and the strong U.S. dollar challenging manufacturers. That stabilized somewhat in the first quarter, with goods exports rising 8.3 percent and goods imports up 4.5 percent. As a result, net exports added 0.07 percent to real GDP. While that contribution was rather paltry, it was significantly better than the 1.82 percentage point subtraction from net exports to the headline number in the fourth quarter.

Finally, government spending subtracted 0.30 percentage points from real GDP, ending two quarters of positive contributions, with reduced spending at all levels. Federal government spending fell 1.9 percent, led by a 4.0 percent decrease in defense, and state and local government spending declined 1.6 percent.

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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