No time to be complacent – US growth slows
US economic growth cooled in Q1 as inventory building slowed, though the biggest gain in consumer spending in more than a year and a lift to homebuilding from warm weather blunted the blow.
GDP expanded at a 2.2% annual rate, slightly less than the 2.5% consensus estimate (Nordea: 2.5%).
Although a 2.2% rate represents some slowing from Q4’s 3.0%, the composition of growth was stronger. Final sales accelerated to a 1.6% annual rate from 1% in Q4, while inventories rose a bit less rapidly, adding 0.6% points to Q1 GDP growth against 1.8% points in Q4.
Domestic final sales – GDP less inventories and net foreign trade – rose 1.6% against 1.3% in Q4, mainly driven by a stronger-than-expected 2.9% gain in consumer spending (consensus: 2.1%; Nordea: 2.2%). However, a drop in the household savings rate from 4.5% in Q4 to 3.9%, the lowest since just prior to the recession, suggests that consumer demand will soon see a marked slowdown unless employment growth picks up – something I don’t see coming the next couple of months (see chart below). Home construction rose 19.1%, its fastest pace since Q2 2010 thanks to the unusually warm winter. On the other hand, after a surprising 2.1% decline in Q1, probably partly related to the reduction in the depreciation bonus from 100% to 50% at the end of 2011, fixed business investments are likely to see a near-term rebound.
Inflation should be of no concern to the Fed in the near to medium term. Thus, Q1 core PCE prices were up 1.9% y/y, in the midpoint of the Fed’s 1.8-2.0% forecast range for Q4 2012.
Implications A 2.2% growth rate is probably only slightly weaker than the Fed’s expectations for Q1. Thus, if the economy continues growing at 2.2% in the remaining three quarters of the year, growth will end up modestly below the lower end of the Fed’s 2.4-2.9% y/y forecast range for Q4 2012.
However, I believe the Fed’s growth forecast will be challenged more in Q2, where I look for some additional loss of momentum as the mild winter weather effects continue to fade, the impact of higher gasoline prices in Q1 kicks in more and manufacturing shifts into a lower gear because of the recession in Europe.
In my view, this will pave the way for a third round of bond purchases (QE3) by the Fed. Fed Chairman Bernanke on Wednesday expressed comfort with the current stance of Fed policy, but held out the prospect of more bond buying if the economy deteriorated, see this post for more details.
I expect next week’s data to add to concerns about the strength of the US economy. Read my preview of next Friday’s employment report and Tuesday’s ISM manufacturing survey in this post.
Have a nice weekend.
Consumer spending set to slow as savings rate rebounds to a more sustainable level