U.S. GDP Growth Climbs 2.3% in First Quarter 2018

By Robert Murray, Chief Economist, Dodge Data & Analytics

BEDFORD, MA – April 30, 2018 – The U.S. economy grew 2.3% in the first quarter of 2018, according to the advance GDP estimate from the Bureau of Economic Analysis.  The first quarter gain follows a 2.9% increase during last year’s final three months, and matches the 2.3% rate of growth that was reported for 2017 as a whole.

The moderate deceleration was due largely to a slower pace for consumer spending, which increased 1.1% in the first quarter following a 4.0% surge at the end of 2017.  Last year’s healthy fourth quarter performance for consumer spending reflected both strong holiday sales and a rebound from a lackluster third quarter affected by the late-summer hurricanes.  In addition, residential fixed investment was flat in this year’s first quarter, following a 12.8% hike at the end of 2017.  On the plus side, nonresidential fixed investment climbed 6.1% in the first quarter, boosted by a 12.3% jump for nonresidential fixed investment in structures.  For the full year 2017, nonresidential fixed investment in structures had grown 5.6%, bouncing back from a 4.1% decline in 2016, so the strong performance in early 2018 maintains the upward track that was re-established last year.  Additional support for the first quarter 2018 GDP reading came from a 4.8% increase for exports, while government spending rose 1.2% with federal nondefense spending up 1.6% and state and local spending up 0.8%.

The advance estimate for first quarter 2018 GDP shows a U.S. economy that continues to proceed at a decent clip.  Some deceleration in overall GDP growth had been expected, given the substantial gains for consumer spending and residential fixed investment at the end of 2017 which were likely above the underlying growth trends.  In addition, recent years have seen a slower rate of GDP growth reported for the first quarter, to be followed by stronger activity in subsequent quarters, which is believed to be related to how the GDP data is seasonally adjusted.  As a result, it’s too early to assess the impact that the Tax Cuts and Jobs Act of 2017 is having on the 2018 economy.  At the very least, the improvement shown by nonresidential fixed investment in this year’s first quarter GDP statistics is consistent with the aim of tax reform to stimulate investment.

What’s apparent is that the U.S. economy is receiving a considerable amount of fiscal stimulus in 2018, both from tax reform and from the passage of the omnibus federal appropriations bill in March.  As 2018 proceeds, it’s expected that GDP growth will strengthen to levels at 3% or slightly above, which should limit any deterioration in market fundamentals for commercial building.  The funding provided by the omnibus federal appropriations bill provides support to the public works sector, especially transportation-related projects.  At the same time, interest rates are rising.  The Federal Reserve has already raised the federal funds rate to the range of 1.5% to 1.75% this year, with two to three more quarter-point rate hikes to come.  And, by the end of April the 10-year Treasury bill had climbed to 3%, after starting 2018 at 2.4%.  Interest rates are still at historically low levels and should not exert much if any dampening impact on construction in 2018, but that dampening impact may well become more discernible next year.