U.S. first quarter gross domestic product likely expanded 2.6 percent, a generous pace of growth given significant headwinds from a slowing global economy, the lengthy government shutdown and a rough winter. But put an asterisk next to it, as the first-quarter expansion was driven by unsustainable inventory accumulation, a temporary narrowing of the trade deficit and a one-time increase in government sponsored construction. The government is expected to release GDP results on Friday. A better indicator of the true growth trend will be final sales to domestic purchasers, which exclude volatile inventory and trade components of GDP. That will likely come in below 2 percent.
While our estimate of a 2.6 percent increase in GDP is modestly above the consensus forecast of 2.2 percent, we do acknowledge some downside risk to the forecast due to ongoing residual seasonality that tends to carry a dead weight of 0.3 percent on first quarter growth estimates. In addition, the ongoing contraction in residential investment, the deceleration in industrial production, which will damp business fixed investment, and a soft quarter of household consumption may also weigh on the forecast. Moreover, we anticipate that the inventory accumulation and an expansion of the trade deficit, which will likely be the primary catalysts of growth in the first quarter, will come back to haunt activity in the second quarter.
A better indicator of the true growth trend will be final sales to domestic purchasers, which exclude volatile inventory and trade components of GDP.
Given our expectation that the composition of the data will not look favorably on domestic economic activity, nor provide a positive forward look at current-quarter activity, policymakers at the Federal Reserve will likely look past this growth report when formulating rate policy. We expect the Fed to instead focus on the slowing trend in real final sales to domestic private purchasers, less government consumption, and inventory accumulation that slowed during the final six months of 2018 to 2.6 percent from 4.3 percent, and is likely to arrive below 2 percent through the first three months of 2019.