Surprise – A Rebound in GDP – April 29, 2019

Gross Domestic Product (GDP), which is the largest measure of U.S. economic activity, unexpectedly rebounded in the first quarter of the year, according to preliminary data from the U.S. BEA. GDP expanded at a 3.2% annualized pace in Q1, up from Q4’s 2.2%. It easily surpassed the consensus estimate from Econoday of 2.3%.

Before briefly delving into the report, Q1’s rebound in GDP illustrates that some of the recession talk we were hearing a couple of months ago was overblown.

Earlier in the quarter, estimates for Q1 GDP were much lower. At one point, the Atlanta Fed’s GDPNow model had estimated growth at just 0.2%. The Blue Chip consensus had placed growth near 1.5%. Yet, the economy managed to shake off weakness and post a rather impressive headline number.

A comment in the business section of the New York Times summed it up well. “The angst has settled, and the economy has come back,” said an economist with Macroeconomic Advisers, a forecasting firm. “I just can’t point to anything now that’s going to push us into recession.”

Absolutes aside, odds of a recession, which had been gradually creeping higher, have receded.

Overstating strength

If we dig into the numbers, the headline was inflated by short-term factors and probably overstated the underlying pace of growth. A spurt in state and local government spending, a buildup in inventories, and an improvement in trade (trade data have been skewed for several quarters due to trade tensions) were responsible for the strong showing.

But we are seeing signs of stabilization, maybe even an acceleration in key economic components.

Residual seasonality

“In past decades, first-quarter economic growth has been substantially lower than the growth in other quarters, even after adjusting for typical seasonality,” according the St. Louis Federal Reserve. If this trend continues, we could see a pickup in growth this quarter.

Nonetheless, 3.2% was a welcome surprise. And it came in the face of the government shutdown and rough winter weather in parts of the country.

In part, it helps explain why the S&P 500 Index and the NASDAQ surpassed prior all-time highs last week (MarketWatch).

Created 2019-04-29 14:52:03