Last week the first release from the BEA of annualized quarter-over-quarter GDP growth printed at 0.7%, well below consensus expectations for 1%. This is a sharp decline from the final revision to the Q4 2016 print of 2.1%. As forecasts for Q1 GDP were revised down throughout the first quarter, much of the rhetoric from economists has argued that investors should “look through” the apparent soft patch, and that growth will rebound in the second quarter.
One of the reasons cited for the weak economic performance in Q1 was a significant drag from inventories, which detracted 0.93% during the period. The argument goes that some re-build in inventories should be expected to contribute to growth in the following quarter. That being said, the other component of the release that acted as a major drag on growth was consumption, which is not a good indicator for an ongoing ability to build and reduce (sell) inventory in the future. Consumption, which accounts for approximately two thirds of GDP in the U.S., fell to 0.3% growth in the first quarter, after averaging over 3% in the prior 3 quarters. Another caveat to the weak growth figure, and one that favors a rebound in the coming quarter, is a seasonal pattern to growth of a weak first quarter that has established itself over the past several years (see the chart below of quarterly GDP prints since 2014).
In all, we continue to believe that growth will muddle along as it has for the last several years, while inflation pressures are likely to remain subdued. There could be some short term boost to these metrics if tax reforms or stimulus are enacted in some form, yet investors seem to be pricing in a lower probability of these outcomes and/or resetting expectations further into the future, which seems appropriate at this time.
Sources: BEA & CITI