The U.S. economy grew at 2.3% in the first quarter, better than the consensus estimate of 2.0%, but a slowdown from the near 3% growth of the prior three quarters. Persistent problems with seasonal adjustment of first quarter data and a lull in consumer activity after some spending was pulled forward in the fourth quarter, likely due to post-hurricane recovery and anticipated tax gains, all weighed on first quarter growth. We continue to expect U.S. growth to accelerate over the rest of the year as these temporary factors roll off, with a strong job market, fiscal stimulus, and global demand providing potential support for consumer and business spending.
Gross domestic product (GDP) data is adjusted to remove seasonal effects. If the seasonal adjustments work, the average GDP for each quarter over the long term should be similar. However, despite seasonal adjustments, first quarter data has underperformed the other quarters consistently enough that economists believe the seasonal adjustments aren’t quite doing their job and there is still “residual seasonality” in the data.
Therefore, it may be helpful to look at first quarter 2018 GDP growth in the context of typical first quarter underperformance. While we don’t know exactly how large an impact residual seasonality may have, even just half a percentage point would be enough to put the first quarter basically in line with the last three. First quarter growth, at 2.3%, was still slightly better than the expansion average of 2.2% for all quarters, and significantly better than the average of 1.3% in the first quarter, which should be read as a modest positive in the face of seasonal headwinds.
CONSUMER SPENDING AND CAPEX SLOW BUT DON’T STALL
The standard way of breaking down GDP is to look at total spending on final goods and services by economic sector, an approach that makes it easy to focus on how different segments of the economy are doing. When you hear the line, “consumer spending makes up 70% of the economy,” this is the approach that’s being used. In Figure 2, we break down the contribution of each segment to the final GDP number over the last two years.
Just from reviewing the chart, it becomes clear that weakness in consumer spending was one of the key culprits for slower growth in the first quarter. Consumer spending only contributed 0.7% to GDP in the first quarter, the sixth weakest contribution of the expansion (now at 35 quarters total). Comparing consumer spending this quarter to the other first quarters of the expansion doesn’t really help, since this quarter is the worst of the nine first quarters so far. However, we do think the quarter needs be looked at in the context of the strong fourth quarter last year. The contribution from consumer spending in the fourth quarter was the third best of the entire expansion, helped by a rebound in economic activity following the devastation of hurricanes Harvey and Irma, and likely by spending pulled forward in anticipation of the passage of the new tax law.