Better than Expected Q1 GDP Suggests Strong 2018 Outlook

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The U.S. Bureau of Economic Analysis reported 2.3% annualized growth in real Gross Domestic Product for the first quarter of 2018. After averaging around three percent growth during the final three quarters of 2017, real GDP growth slowed to start 2018. Higher federal spending levels and elevated confidence should help growth move higher during the rest of the year.

Consumer spending growth slowed in the first quarter. Individual tax cuts should add to consumer spending power later in the year, as could accelerating wage growth particularly with the pickup in today’s Employment Cost Index data. Soft retail sales numbers to begin the year contributed to a larger inventory build, adding to GDP growth and partially offsetting the slowdown in consumption.

Business investment showed further momentum, particularly in non-residential structures, which may be benefiting from lower capital costs due to the new tax legislation. Structures, along with equipment, which benefits from the new law’s expensing provisions, are poised to gain momentum during the year. However, rising uncertainty connected to data protection issues, trade policy uncertainty, and perhaps a softening in global economic growth could dull this upward movement.

Residential investment was flat during the first quarter. Higher interest rates may prove a formidable barrier to surmount even though demand for new homes remains strong. As treasury rates move north of three percent, mortgage rates will also rise, dissuading potential home buyers. The Federal Reserve has reacted to upward inflationary pressure so far by moving closer to three rather than two rate increases during the rest of 2018. Today’s number should push the bank towards this more aggressive rate tightening path.