GDP Growth Blows Past Expectations

1

Recession? What recession?

Earlier this morning, the Bureau of Economic Analysis announced that the U.S. economy grew by 3.2% in the first quarter of 2019. It was the best Q1 growth to start a year since 2015, when quarterly GDP topped out at 3%.

Economists – who expected growth of 2.5% for the quarter – were blown away by the Bureau’s initial read of the economy, and analysts spanning the globe rejoiced.

But the sterling 3.2% number doesn’t come without some concerns, as noted by a few cautious folks on Wall Street:

“The upside beat was helped by net trade (exports jumped while imports contracted sharply) and inventories which combined contributed almost 170 bps (basis points) of the rise,” said Peter Boockvar, Bleakley Advisory Group CIO (chief investment officer).

“Personal spending though, the biggest component was up just 1.2%, two tenths more than expected as an increase in spending on services and nondurable goods offset a decline in spending on durable goods.”

Exports rose 3.7% for the quarter, while imports dropped 3.7% – neutralizing a net gain for trade. Investments in intellectual property products skyrocketed, though, rising 8.6%. This alone contributed to greatly to the GDP growth “beat”.

Most interesting though, was a 3% increase in disposable personal income, parallel to a 1.3% rise in the prices of goods and services (excluding food and energy). Overall, prices jumped only 0.8% for consumers, suggesting that Americans had more cash to blow on products in Q1 that really didn’t get much more expensive.

And for an economy that was getting ready to absorb a consumer sales slump, that’s very encouraging news.

Outside of the raw data, Q1’s economic growth also gave economists some rare insight into a “best possible scenario” after a government shutdown. From late December to January 25th, the Trump administration and congressional Democrats sat through the longest shutdown in history (lasting 35 days).

And it seems that after the quarter concluded, all the shutdown paranoia was overblown. The economy roared while Washington was gridlocked, bucking the “sky is falling” predictions repeated ad nauseum by analysts in the financial media.

More than anything, though, this morning’s growth report may have tempered fears over a global economic slowdown – for the short-term, at least.

“At a time of lingering U.S.-Chinese trade uncertainty and weak economic data everywhere from Germany to Korea to Japan, strong U.S. data acts as an insurance policy against further global economic weakness,” said Alec Young, managing director of global market research at FTSE Russell.

“With inflation still subdued, it’s too early to start worrying about Fed rate hikes again.”

And while Wall Street may be pleased by the recent report, the most important reaction will be from Fed Chairman Jerome Powell, as noted by Young.

Stability from Powell for the rest of the year will likely be a boon to market bulls, and based on what this report is showing us, monetary policy should remain the same.

The Fed got burned on their last rate hike, and any change from here would be an unnecessary variable. If the first quarter’s reported GDP growth is accurate, the best thing that Powell can do is to simply let the American economy flourish.

After all, if it “ain’t broke” like so many people initially thought, why try to fix it?

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