Weak Q1 GDP Growth

By Thomas Cooley, Ben Griffy and Peter Rupert

The advance estimate from the Bureau of Economic Analysis shows the weakest GDP growth in three years…although 2015 Q4 (0.9%) and 2016 Q1 (0.8%) were nothing to write home about.

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Consumption (lack of) played a large role in the decline, only up 0.3%, along with a $39.2 billion decline in inventories. This is clearly at odds with the surge in consumer and business sentiment following the election of Donald Trump. That optimism about the economy has yet to translate into real improvement. The deeper issue is whether the first quarter weakness will spill over into the second.  Most observers think not although we are probably not on track for growth greater than 2%.

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On the positive side, investment expenditures came in strong, both non-residential and residential. Overall, fixed investment was up 10.4% with non-residential structures up 22.1%, equipment up 9.1% and intellectual property products up 2.0%. Residential investment was also quite strong, growing 13.7% in the first quarter.

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Government consumption expenditures and gross investment was down 1.7%, the main contributor to the decline was national defense spending, down 4.0%. State and local government was also down 1.6%.

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While the weak GDP report along with the earlier weak jobs report may lessen the resolve for the Fed to move aggressively on rate hikes, the recent surge in employment costs may be signaling a tight labor market.

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