KEY DATA: GDP: +3.2%; Consumption: 1.2%; Investment: +2.7%; State and Local Government: +3.9%; Consumer Prices: +0.6%/ Confidence: 97.2 (Down 1.2 points)
IN A NUTSHELL: “The headline GDP number looks great but the details are a lot less positive.”
WHAT IT MEANS: The economy did a lot better than expected during the first quarter as growth exceeded 3%. But let me repeat what I frequently state: The devil – and the real information – is in the details. There, the numbers look a lot less positive. Take consumption, please! (Drum roll here.) We knew that vehicle sales were soft, which brought down durable goods spending. But demand for nondurables and services was mediocre and with gasoline prices rising, there is little reason to expect households to shop ‘till they drop this spring. As for businesses, they bought lots of software but little hardware and spent even less on structures. That doesn’t point to any major investment surge. And, as expected, housing restrained growth. So, where did things go right? Where I warned there could be some strange results. Take trade, please! (Okay, enough Henny Youngman.) Exports rose while imports fell, meaning the trade deficit narrowed much more sharply than expected. That added one full percentage point to growth and explains most of why growth exceeded forecasts. I had suggested that the tariff issues could have led to strange patterns in trade and that is likely what happened in the first quarter. There is very little reason to think that a strong economy would lead to lowered imports, so don’t expect the trade deficit to keep narrowing. The second place I thought we could have something strange was in inventories. Warehouses filled sharply, adding two-thirds of a percentage point to growth. It is not clear those additions were intended, so don’t be surprised if inventories are drawn down, slowing growth this quarter. Finally, state and local governments spent like drunken sailors. This sector added four-tenths of a percent to growth. Really, does anyone believe state and local governments will spent so crazily going forward? Meanwhile, inflation went absolutely nowhere. In summary, the headline was great but the details were not so good.
As for consumer confidence, it faded a touch in April. The University of Michigan’s Consumer Sentiment Index dropped modestly as both the current conditions and expectations components declined. The index remains at a high level as respondents are nearly ebullient about their financial prospects. MARKETS AND FED POLICY IMPLICATIONS: I have been saying for months that the economic fundamentals were solid and the Fed, make that Chair Powell, panicked in December. So, I should be happy with this number as it supports my argument. But the reality is that growth is not strong, at the least when you consider the performance of the two key segments, households and businesses. Consumption was weak and business investment was mediocre. Worse, I don’t see any reason why that would change anytime soon. So, what I and probably most other economists are doing is making down second quarter growth. The trade deficit should widen and inventories become a drag. While investors may be happy with this report, and Mr. Powell will have a lot of explaining to do, it really doesn’t change much when it comes to growth: It is decent but not great. Now if we back this up with another near-3% growth rate, I will have to re-evaluate my thinking, but so would the Fed. Indeed, if spring growth were strong, the Fed would be foolhardy not to consider hiking again, even if inflation remains tame. In other words, no good economic news goes unpunished!