The Economy

U.S. Economy Posts Surprise 3.2% GDP Gain

GDP got a boost in Q1 from a sharp decline in imports but economists warn that underlying spending and investment data point to slowing growth.
Matthew HellerApril 26, 2019
U.S. Economy Posts Surprise 3.2% GDP Gain

The U.S. economy grew more than expected in the first quarter amid a sharp decline in imports and a buildup of inventories but economists said underlying trends are consistent with an economic slowdown.

The Commerce Department reported Friday in its initial estimate of first-quarter growth that gross domestic product rose 3.2%, easily topping economists’ estimates of a 2.5% gain. It was the first reading above 3% since time since 2015, easing fears of a recession.

“The angst has settled, and the economy has come back,” Ben Herzon, an economist with Macroeconomic Advisers, told The New York Times. “I just can’t point to anything now that’s going to push us into recession.”

Drive Business Strategy and Growth

Drive Business Strategy and Growth

Learn how NetSuite Financial Management allows you to quickly and easily model what-if scenarios and generate reports.

But the improved trade balance — exports rose 3.7% in the first quarter, while imports decreased by 3.7% — and inventories contributed almost 170 basis points of the GDP growth.

Some economists don’t see net trade adding to GDP as the year continues and are focusing on final sales to private purchasers, a closely-watched measure of private-sector consumption and investment that slowed sharply in the first quarter to a 1.3% annual rate, the lowest in nearly six years.

Consumer spending increased only 1.2%, after a 2.5% jump in the previous quarter, and spending on durable goods plunged 5.3%, the worst since 2009.

“On the outside, [the economy] looks like a shiny muscle car,” economist Bernard Baumohl of the Economic Outlook Group wrote. “Lift the hood, however, and you see a fragile one-cylinder engine.”

Amid signs of slowing growth, the Federal Reserve has put the brakes on raising interest rates and economists believe it will recognize the first-quarter GDP gain is temporary.

“Fed policymakers are going to look right past that 3.2% top-line number and focus on the composition of growth, which will reaffirm its prudent pause,” said Joseph Brusuelas, chief economist at RSM.

According to MarketWatch, the trend in final private sales shows the fading effects of the Trump tax cuts. “Business investment is growing about one-fourth as fast as it was in the first quarter of 2018 when the corporate tax cut kicked in,” it noted.

Image: Getty