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30 April 2019

Break-down of the US GDP data 

Expectations for last Friday’s Q1 GDP figure were for 2.3% growth. Turn the figures around and 3.2% is what the markets in fact got. Is this goodbye to seasonally weak structural Q1 GDP growth?

Not too fast! Behind the big figure, there was a lot to digest and, once again, the devil was in the detail. If one were to subtract net trade and inventories, the net outcome would have been very different. Real inventories added 0.7% to Q1 growth and, as ever, there is a risk of an inventory drag on growth in Q2 and/or Q3. And because exports rose while imports declined, the net trade figure added up to a very impressive 1% to Q1 growth. The weaker-than-expected imports partially reflect decreasing consumer demand and indeed the other data points in the report confirm this. Consumer spending rose at the slowest pace in four quarters. After taking private and public consumption together, final domestic demand only increased 1.5%, the smallest rise since Q4 2015. Also underwhelming was residential investment which was down for the 5th straight quarter. Business investment was up but mainly on the back of higher spending on intellectual property, whereas spending on equipment rose just by 0.2%. The big capex wave hasn’t occurred quite yet.

But just perhaps the biggest surprise came from a falling core PCE price index, which rose just 1.3% QoQ, down from 1.8% the quarter before. Annualised this makes for a 1.7% increase, well below the 2% the Federal Reserve is aiming for in the long run. Indeed, this preferred Fed inflation gauge parameter does not show that inflation is about to surge; hence this week’s FOMC is not expected to send out any hawkish signals. If anything, the futures markets are repricing the odds of a cut in rates. The probability has increased once again after this GDP report. Of course, there is much more than the FOMC to watch out for. As we kick off a new week, ISM data and the jobs figures will be scrutinised again.

But in the meantime Bonds rallied on the GDP data from last Friday. Whether they will continue to do so depends entirely on this week’s data.