Real GDP rose a revised 0.8% in the first quarter, 0.3% ahead of initial estimates, but less than many had expected. The upward revision was due to stronger inventories than initially reported, which leaves more to be drained in the second quarter. Discussions with manufacturers, however, suggest that we are close to a trough in inventories in the second quarter. Residential fixed investment was also revised up, reflecting the ongoing healing in the housing market, and the return of first-time home buyers. Households have regained some of their mojo in recent months, and look poised for a snapback as we move into summer.
Separately, the drop in exports was not as big as initially reported. This reflects the bottoming of growth abroad, a temporary breather on dollar appreciation. More recent data on exports suggest that they will post a slight increase in the second quarter. The headwinds created by a strong dollar, however, are likely to return as the Fed gets back to the business of raising rates.
The surprise in the data was consumer spending, which remained unchanged at a 1.9% pace. That is more than double the pace of overall economic growth, and underscores the role consumers are playing over businesses in supporting the economy. It is still shy of expectations, however, which moved up in response to recent upward revisions to retail sales. This is in addition to our view that retail sales were undercounted in January and February, when prices at the pump plummeted.
Growing momentum in both the housing market and consumer spending suggest that we will see a snapback in growth in the second quarter. Government spending has also moved back into the black at both the federal and state and local levels. Repairs to our roads and bridges, however, will continue to fall short of what is needed. Be careful driving over bridges this summer. Exports also look poised to rise after falling in the first quarter, while the drawdown in inventories abates. Most manufactures we have spoken with have been somewhat surprised by how rapidly their inventories fell at the start of the second quarter.
Another reason for a rebound in growth is bit more arcane, and involves the seasonal adjustment that the statistical agencies make to the data. A weak first quarter has been followed by a sharp rebound in the second quarter in 11 of the last fifteen years. One can actually go back to the late 1990s and see a problem in data. The statistical agencies thought that they had dealt with the issue, but the jury is still out. The trajectory of the economy is probably better judged by averaging the first two quarters of the year, which is expected to show growth closer to 2% than 1%; that isn’t great but better than the alternative, which is a slowdown or worse.
Bottom Line: The economy grew less than hoped in the first quarter. Some of that weakness was real, some of it was an illusion created by faulty data. Either way, the Fed will feel justified in raising rates in June.