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Stagflation-Lite Coming Up? 1st Quarter GDP 0.5% as Consumer Spending Decelerates

The latest GDPNow forecast of 0.6% first quarter GDP was nearly spot on. The BEA's Advance Estimate of first quarter GDP came in at 0.5%.

Deceleration is the word of the day.

Real gross domestic product -- the value of the goods and services produced by the nation's economy less the value of the goods and services used up in production, adjusted for price changes -- increased at an annual rate of 0.5 percent in the first quarter of 2016, according to the "advance" estimate released by the Bureau of Economic Analysis. In the fourth quarter, real GDP increased 1.4 percent.

The increase in real GDP in the first quarter reflected positive contributions from personal consumption expenditures (PCE), residential fixed investment, and state and local government spending that were partly offset by negative contributions from nonresidential fixed investment, private inventory investment, exports, and federal government spending. Imports, which are a subtraction in the calculation of GDP, increased.

The deceleration in real GDP in the first quarter reflected a larger decrease in nonresidential fixed investment, a deceleration in PCE, a downturn in federal government spending, an upturn in imports, and larger decreases in private inventory investment and in exports that were partly offset by an upturn in state and local government spending and an acceleration in residential fixed investment.


Subtracting from GDP vs Last Quarter

  • Nonresidential fixed investment
  • Private inventory investment
  • Exports
  • Federal government spending
  • Imports


Adding to GDP

  • Personal consumption expenditures (PCE)
  • Residential fixed investment
  • State and local government spending

PCE (consumer spending) added to GDP but is decelerating.


Economists' Estimate 0.7%

The Bloomberg Econoday consensus estimate was 0.7% in a range of 0.1% to 1.1%.

Highlights

Consumer spending, largely on services, helped hold up first-quarter real GDP which came in at an annualized plus 0.5 percent rate and just below the Econoday consensus for 0.7 percent. Consumer spending (personal consumption expenditures) rose at a 1.9 percent rate, down only 5 tenths from the fourth quarter. Within this, spending on services rose an in-trend 2.7 percent to offset a 1.6 percent decline in durable goods which were hit by weak vehicle sales.

Residential investment, up 14.8 percent, is a highlight of the report and helped offset a sharp 5.9 percent decline in nonresidential investment where weak energy drilling is taking a big toll. Inventories rose in the quarter but at a slower rate which is a negative for GDP while exports, reflecting weak global demand, were a negative for a second quarter in a row. Government purchases were a small plus in the quarter.

Price data are mixed with the price index up only 0.7 percent in the quarter, down 2 tenths from the fourth quarter. But the core deflator is up, 7 tenths higher to plus 1.9 percent which should get some attention.

The consumer bailed out the first quarter, both on services and also on fixing on their homes. But otherwise the report points to nearly no momentum going into the Spring quarter.

Recent History

The first estimate for first-quarter GDP is expected to come in at only plus 0.7 percent in what would be the weakest result since plus 0.6 percent in the first-quarter last year. But unlike last year, this year's first quarter was not hit by severe weather which underscores how soft the quarter likely was. Consumer spending, though soft, may improve slightly while residential investment, which has been strong, may slow. Inventories are expected to pull down GDP as businesses destocked. Net exports may also be a negative. The GDP price index is expected to further soften, to only plus 0.5 percent from 0.9 percent in the fourth quarter.


Bloomberg Statement 1 vs. Statement 2

  1. Consumer spending, largely on services, helped hold up first-quarter real GDP ...
  2. The consumer bailed out the first quarter, both on services and also on fixing on their homes.

The statements are contradictory.

Explanation: Consumer spending decelerated but was still strong enough to make a positive contribution to GDP.

Any further "deceleration" of consumer spending or housing will push GDP into contraction.

Now that the auto sector has rolled over, housing is about all that's left holding things together.


Stagflation-Lite?

Core PCE, the Fed's preferred measure of inflation is +1.9 percent.

Should inflation tick up coupled with weakening GDP, the economy will be in a Stagflation-Lite scenario.

Would the Fed hike into that? I don't think so and neither does the market.

For further discussion, please see Fed Still Expects Two Hikes, Market Still Says One, Not Until November.

For those who said "Falling oil prices are unambiguously positive for the economy", I have a question: Are rising oil prices now unambiguously negative for the economy?

 

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