GDP Growth Slows But Doesn’t Shrink

Article originally posted on Globe St. on April 25, 2024

The advance estimate of GDP for the first quarter was an annual rate of 1.4%. That there would be a drop from the 3.4% rate in the fourth quarter of 2023 was widely expected. The details of what moved and how are important.

But first, recognize that this was a slowing of real gross domestic product growth, not a fall in GDP, and so probably not a sign of a recession. The rough rule-of-thumb of two consecutive quarters of negative growth wouldn’t even start under this result. Although the actual call of a recession by the National Bureau of Economic Research uses a far more complex set of metrics, it has never seen a recession when there was no fall in GDP. Also, advance estimates often change as additional information is available.

The increase in real GDP owed to various parts of the economy — consumer spending, residential fixed investment, non-residential fixed investment, and government spending — according to the Bureau of Economic Analysis. Slowing economic growth were a decrease in private inventory investment and an increase in imports, which are considered a reduction of GDP. (A strong dollar tends to correlate with increased imports, as well as contributing to a reduction of manufacturing reshoring but an increase of warehousing.)

Steven Blitz, managing director of global macro and chief U.S. economist at GlobalData.TS Lombard, notes that real growth has continued to strengthen during the first quarter in four critical categories: consumer discretionary consumption, residential fixed investment, non-residential fixed investment, and non-residential fixed investment in technology.

“The downswing in inventory, and sharp slowdown in government spending, are not critical determinants of the economy moving ahead, only of the data measuring growth in Q1,” Blitz wrote. A good sign is that government spending has not been the force keeping the economy up. “What is problematic is the strong dollar shifting purchases of capital equipment from domestic to foreign producers – contrary to the best efforts of government policy (taxes, tariffs, and spending).”

This part of the data is not something that the Federal Reserve would find terribly disturbing. “US GDP is volatile and subject to large revisions, therefore the weaker-than-anticipated gain in Q1 is not troubling,” wrote Oxford Economics in a note. “The deceleration in GDP growth will not worry the Federal Reserve as the details are better than the headline suggests. Combined, inventories and trade were larger-than-anticipated drags on Q1 GDP, but inventories are among the most volatile components of GDP.”

What could affect the Fed is the personal consumption expenditures (PCE) price index, which increased 3.4% in the first quarter, compared to 1.8% in 2023 Q4. Core PCE, which doesn’t include the volatile food and energy parts, was up 3.7%, versus the 2.0% at the end of 2023. PCE is the Fed’s preferred inflation metric, which could mean even more delay in rate cuts.