U.S. economic output for the first three months of 2019 expanded at a strong 3.2 percent pace, despite a slowdown in household consumption to 1.2 percent, headwinds from the external sector, a lengthy government shutdown and a rough winter.
The primary growth drivers were a massive increase in inventory accumulation of $128.4 billion and a narrowing in the trade deficit to $899.3 billion from $955.7 billion, both of which provided a one-time boost to growth that will not be replicated in the current quarter. Stripping that out, the growth picture is decidedly different and points to a slowing toward the long-term trend growth rate of 1.8 percent.
Final sales to domestic private domestic purchasers increased at a more modest 1.3 percent, final sales to domestic purchasers increased 1.4 percent and real final sales advanced 2.5 percent. To put this in perspective, real final sales to domestic private domestic purchasers slowed from 4.3 percent in mid-2018 to 1.3 percent just nine months later. This is not the stuff of an economy growing at or above 3 percent on a sustainable basis.
No inflationary risk seen
The economy avoided a recession on the back of the mini-financial shock in the final quarter of 2018; once one strips out volatile components, it looks to be slowing back toward the long-term trend growth rate of 1.8 percent. That is a good place for the economy to be, and the inflation data all point to no risks to the economic outlook from inflation. The Federal Reserve will look right past the 3.2 percent quarterly growth estimate and focus on the composition of growth, which points to a slowing trend amid softening inflation. This data reinforces the prudent pause the Fed is engaged in, and forward-looking investors and chief financial officers should expect no rate hike or rate cut until 2021.
The Federal Reserve will look right past the 3.2 percent quarterly growth estimate and focus on the composition of growth, which points to a slowing trend amid softening inflation.
Inside the U.S. Commerce Department report, household consumption slowed to 1.2 percent due to a 5.3 percent decline in purchases of durable goods, a modest increase of 1.7 percent in non-durables and a 2 percent increase in services demand. One should anticipate a modest rebound in the current quarter, driven by sustained hiring and mild wage increases.
Gross private investment increased 5.1 percent, while fixed business investment advanced at a 1.5 percent pace. This was driven by an increase in government-sponsored construction, which resulted in a 2.7 percent increase in non-residential investment. Like the trade and inventory data, this is not a sustainable increase, thus it will be partially reversed in the current quarter and act as a drag on growth.
On a more encouraging note investment in intellectual property advanced 8.6 percent, which more than overshadowed the anemic 0.2 percent increase in outlays on equipment. Residential investment overall declined by 2.8 percent.
Government spending advanced 2.4 percent as national defense spending increased 4.1 percent, state and local spending fell 3.9 percent and non-defense spending dropped 5.9 percent. Clearly this pace will not be replicated in the current quarter. Moreover, there is a $126 billion dollar fiscal cliff awaiting the economy, should there not be a bipartisan movement toward extending temporary measures from the 2017 Tax Cuts and Jobs Act and the Fiscal Year 2018 budget.
