The U.S. economy grew at an annualized rate of 3.2% in the first quarter of 2019, according to the “advance” estimate.
While aggregate growth rate looked strong, the components raise some questions.
Let’s look at some of these components and their contribution to this quarter’s GDP growth.
Net Exports contributed a full one (1) percentage point to GDP growth, or over 31 percent of this quarter’s GDP growth. Exports were up $23 billion, while imports actually declined by $33 billion. This is unusual and probably not sustainable.
The change in inventories contributed seven-tenths of a percentage point to GDP growth, or over 21 percent of this quarter’s GDP growth. The magnitude of the change In inventories- $31 billion - is not out of the ordinary. But inventories will fluctuate as business sees trends in sales. This level of contribution to GDP growth may not continue.
Two areas that were down quarter over quarter were business investment in equipment and structures. These areas resulted in nominal negative contribution to GDP growth this quarter. Are there important signals here regarding business view of the future economy? Does business not see “second curve” growth in sales to confidently expand plant and equipment? In fact, the 5.4% decline QoQ in durable goods could support that less than optimistic view.
Two sectors showing solid growth this quarter were in government. State & local government spending was up 3.9% and contributed four-tenths of one percent to GDP growth. And federal defense spending was up 4.1% and contributed two-tenths of one percent to GDP growth.
It is difficult to see the case for +3% GDP growth going forward without business investment rising.
While continued economic growth is expected, it may be a more moderate 2% to 2.5%. The current economic cycle is expected to continue its growth and become the longest sustained growth cycle in recent history in July!