Unusual Circumstances Lead to Dubious Economic Growth

Written by SK Ashby

The economy grew at an annualized rate of 3.2 percent during the first quarter of the year according to preliminary estimates released by the Commerce Department this morning.

That's significantly higher than many economists predicted (some predicted the economy would grow at a rate as low as 1.5 percent), so what exactly is going on here?

Recent reports indicating that consumer and business spending slowed sharply during the first quarter were correct. And those reports are what led to predictions for meager growth during the first quarter, but companies are sitting on the largest inventory of goods they've had in four years and --gasp!-- big government spending is also filling the void of weak demand from American consumers.

From Reuters:

Exports surged and imports declined in the first quarter, leading to a small deficit that added 1.03 percentage points to GDP after being neutral in the fourth quarter. Trade tensions between the United States and China have caused wild swings in the trade deficit, with exporters and importers trying to stay ahead of the tariff fight between the two economic giants.

The standoff has also had an impact on inventories, which increased at a $128.4 billion rate in the first quarter, the strongest pace since the second quarter of 2015. Inventories increased at a $96.8 billion pace in the October-December quarter. Part of the inventory build was because of weak demand, especially in the automotive sector, which is expected to weigh on future production at factories.

Inventories contributed 0.65 percentage point to first-quarter GDP after adding one-tenth of a percentage point in the October-December period.

Growth in consumer spending, which accounts for more than two-thirds of U.S. economic activity, slowed to a 1.2 percent rate from the fourth quarter’s 2.5 percent rate. The moderation in spending reflected a decline in motor vehicle purchases and other goods, likely related to a 35-day shutdown of the federal government. There was also a slowdown in spending on services.

Spending by American consumers slowed to a crawl and companies responded by increasing exports to markets outside of China. The surge in exports added over 1 percent to GDP while inventories piled up and added another 0.65 percent. Government spending also increased by 2.4 percent.

Unfortunately, these are not things that are noticeable or tangible to the vast majority of Americans while the sharp decline in consumer and business spending is. Growth in consumer demand slowed to just 1.2 percent during the first quarter of the year which was the lowest level of demand since 2013.

Like the brief period of 4 percent growth seen 2018 which was fueled by a last-minute surge in exports from businesses trying to get ahead of Trump's trade war, we may not see this much growth again this year.

Of course, for most Americans, it's already a sight unseen.

The Commerce Department's initial estimates could be revised downward in the near future or when next quarter is reported.