Q1 GDP Growth as Expected, but Still Disappoints

By Richard Branch, Senior Economist

As was broadly expected U.S. GDP growth underwhelmed in the first quarter of the year, increasing 0.7% on an annualized basis from the fourth quarter of 2016. Since 2014, GDP growth in the first quarter has been noticeably weak, only to rebound in the final three quarters of the year. Much of the blame has been placed on the “residual seasonality” in the data that the Bureau of Economic Analysis uses, and has resulted in most observers (including Dodge Data & Analytics) significantly discounting what first-quarter data say about the overall state of the economy.


On the surface, much of the concern with the gross domestic product report lands squarely on consumer spending, which accounts for roughly two-thirds of all U.S. economic activity. In the first quarter, consumer spending rose by just 0.3% on an annualized basis – the slowest pace of growth in consumer spending since the second quarter of 2013. Consumer spending slowed amongst most major categories, but after three consecutive quarters of 3%+ growth in spending a breather may not be out of line. Stronger consumer confidence, decent income growth, and still-low borrowing rates should allow spending growth to resume in the second quarter. Government spending fell in the first three months of the year, dropping 1.7% on an annualized basis. This too is unlikely to persist with an increase in defense spending expected as the year moves forward. Inventory drawdown also took nearly one percentage point off the overall GDP growth rate.

On the plus side of the ledger, residential investment grew 13.7% on an annualized basis and nonresidential fixed investment climbed an annualized 9.4%. Business investment has been lacking in consistency since the beginning of the recovery, but in the first quarter business spending was up across the board including spending on equipment (up 9.1% annualized) and investment in structures (up an annualized 22.1% over the fourth quarter).

We expect the U.S. economy to resume a more measured pace of growth as the year progresses, with growth for the full year coming in near 2.5%, a marked improvement over 2016’s 1.6% pace as the seeds of organic growth in the labor market and in growing business and consumer confidence are firmly rooted.



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Cailey Henderson | 104 West Partners | cailey.henderson@104west.com