Economic Outlook Remains Positive Despite Slower GDP Growth

Real gross domestic product rose at a 2.3 percent annualized rate in the first quarter, down from a 2.9 percent pace in the fourth quarter of 2017, according to the Bureau of Economic Analysis. Notwithstanding the slower gain in the first quarter, growth over the past four quarters hit 2.9 percent, the fastest four-quarter gain since the second quarter of 2015 (see chart). Inventory accumulation and slower imports growth (imports detract from GDP in national income accounting) combined to help offset slower rates of growth in most other areas.

Consumer spending decelerated sharply in the first quarter, rising at a lethargic 1.1 percent pace compared to a 4.0 percent growth rate in the fourth quarter. The deceleration was mostly the result of a drop in spending on goods, with durable-goods growth declining from a 13.7 percent pace of growth in the fourth quarter to a 3.3 percent rate of decline in the first quarter. Nondurable-goods spending rose at a 0.1 percent pace versus a 4.8 percent rate in the previous quarter. Spending on services slowed slightly, from 2.3 percent to 2.1 percent.

Business investment rose at a 6.1 percent annualized rate in the first quarter of 2018. That gain was led by a 12.3 percent surge in spending on structures, while spending on equipment rose 4.7 percent and intellectual-property investment rose 3.6 percent. In the fourth quarter, business investment rose at a 6.8 percent pace.

Residential investment, or housing, was unchanged in the first quarter compared to a 12.8 percent rise in the prior quarter. Altogether, business and residential investment contributed 0.76 percentage points to total GDP growth compared to a 1.31 percentage-point contribution in the fourth quarter. Inventory accumulation by businesses added an additional 0.43 percentage points to first-quarter growth after subtracting 0.53 percentage points in the prior quarter.

Net exports had a positive impact on overall GDP growth in the fourth quarter, adding 0.20 percentage points to growth. Exports rose at a relatively robust 4.8 percent pace while imports grew at a substantially slower 2.6 percent rate, well below the 14.1 percent surge in the prior quarter.

Government spending rose at a 1.2 percent annualized rate in the first quarter compared to a 3.0 percent increase in the fourth quarter, contributing 0.20 percentage points to growth versus a 0.51 point contribution in the final quarter of last year.

Real final sales to private domestic purchasers, a key measure of private domestic demand, rose at a modest 1.7 percent annualized rate in the first quarter, down from a 4.8 percent pace in the fourth quarter (see chart). The first-quarter gain was the slowest since the first quarter of 2016. Over the past four quarters, real private domestic demand is still up at a healthy 3.0 percent rate, slightly below the 3.3 percent gain for the four quarters of 2017 but well above the 2.2 percent rise for the four quarters ending with the third quarter of 2016.

The underlying trend in real private domestic demand remains well-supported by continued job creation, rising wages, healthy corporate and consumer balance sheets, solid corporate-sales and corporate-earnings growth, and high levels of business and consumer confidence. The virtuous cycle between the consumer and corporate sectors is likely to provide ongoing support for further gains in real private domestic demand, suggesting continued economic expansion in the months and quarters ahead. The positive outlook is further support by the results of the AIER Leading Indicators index, which scored a perfect 100 reading in March.