Revised First Quarter GDP and Weekly Jobless Claims

KEY DATA: GDP: 2.0% (from 2.2%)/ Claims: +9,000

IN A NUTSHELL: “A disappointing first quarter expansion is likely to be followed by robust second quarter growth.”

WHAT IT MEANS: Is the economy weak or strong? Did the tax cuts add to growth or do little? The answer to both those questions is, of course, yes. The third estimate of first quarter growth came in a little less than expected. The economy grew decently, but consumers did not spend a whole lot of money, especially on big-ticket items, restraining the expansion. Indeed, consumption grew at the slowest pace in five years. But the major reason for the downward revision to GDP came from less inventory building. Firms added to stocks at slower pace than previously thought. That, though, actually is a positive for second quarter growth. The data are indicating that both businesses and households picked up the spending pace in the spring. With less stock in the warehouses, production had to rise even more to meet the emerging jump in demand.

Corporate profit estimates were also revised and they grew robustly, to say the least. When taxes and certain adjustments are taken into account, profits were up nearly 17% over the level posted in the first quarter of 2017. Look for those numbers to get even bigger as we go through the year. Now if we can only get businesses to invest even more of those dollars, the economy would be in great shape.

Jobless claims jumped last week but that is hardly unusual. Smoothing out the ups and downs, the level remains extremely low. Conditions are so tight the firms are once again hiring teenagers. Challenger, Gray and Christmas reported that teenage hiring in May was up 73% over May 2017 levels.

MARKETS AND FED POLICY IMPLICATIONS: The economy does not grow in a consistent manner. Some quarters are disappointments while some exceed even the most optimistic forecasters’ estimates. So don’t make much of the first quarter number. Indeed, we could see second quarter growth at double the first quarter pace. Of course, averaging those two out would put us at where most economists expect growth to be this year: roughly 3%. Given the huge tax cuts, the massive surge in after tax profits, large increases in government spending and an already solid economy, that pace would be a disappointment. Three percent growth is what the president’s economists say is the sustainable level over the next ten years. That is in their forecasts. But if we can only get roughly three percent when you hype the economy at a pace maybe never seen before, you have to be concerned. The impacts of the tax cuts will wear off over the next twelve to eighteen months, so where do we go from there? Businesses may be at a much higher level of activity, but they still have to grow from that level and that means consumer spending will have to be a lot better. And that will require wage growth to accelerate sharply. But we have had no sign that will happen and if it does, what will happen to inflation and interest rates? If you are wondering why so many economists are raising their probability that a recession could start in late 2019 or the first half 2020, that is why.