Macro Focus — Q1 GDP Stalls

Wed, APR 30th, 2014

Huge miss on Q1 GDP, +0.1% quarter over quarter vs. +1.2% expected by economists [GDP growth was +2.3% year over year]. However, it is generally agreed that the brutally harsh weather this winter was largely to blame for the near pause in output. By in large I tend to agree with this notion. My reasoning is simple: the number was so horrible, so awful, so strangely off-trend that nothing else makes sense in my view. When you consider that the underlying economic data still looks pretty strong and that it has been accelerating since March, this is the best conclusion I can draw. The statistic in the report that I believe underprops the true trajectory in the economy – personal consumption – rose +3%, better than the +2% expected. This was the first time since 2005 that consumption grew +3% or more two quarters in a row, though ex-health care purchases the number dips to +1.8%. *Note, under the health care reform law everyone must have health care or pay a fine. The deadline to enroll and purchase insurance was March 31st, 2014. This mandate, in conjunction with Medicaid expansion associated with the law, resulted in the largest rise in health care spend since 1980.*

This +3% consumption number contributed 200 basis points to GDP. To see how each component affected the report please refer to the Reuters chart I have provided below.

Under the report’s hood, the deceleration of the headline number primarily reflects downturns in exports [-7.6%], in nonresidential fixed investment and capex [-2% and -5.5%], and residential investment [-5.8%]. These are areas where adverse weather can dramatically dislocate activity. Other areas of weakness came from a drop in private inventory investment [-$24.3B from the Q4 build] and further decline in government spending [-0.5%]. A draw down in inventory was expected; this number is typically volatile quarter by quarter, particularly from Q4 to Q1.

Aside from adverse weather, I do think that an ongoing general slowdown in housing activity – a direct result of reduced affordability – has negatively impacted GDP for a couple of quarters. Nevertheless, I trust that over the medium- and longer-term housing will track job growth, income gains and the availability of credit. All of these are drifting higher. Over the shorter-term there will certainly be some lumpiness as rates and prices rise [i.e. affordability]. In addition, institutional cash that flowed into the housing market over the past couple of years in search of rental income [yield] has begun to fade.

All told, to borrow a trite expression the lousy headline number should be taken with a grain of salt. Indeed, I expect a solid snap-back in Q2 GDP and a smoother course in the 2H14. The labor economy and household consumption are the two most important criteria I look at in order to judge the trajectory of the broad economy. These two sectors continue to demonstrate resiliency. Other pockets of the economy like industrial, energy & factory production, corporate earnings, credit [including the arc of the yield curve], stable inflation, reduced fiscal drag and accommodative monetary policy augur well for a +2-3% GDP growth path.

Finally, let us not forget that this is the first estimate of Q1 GDP. We will see two more stabs at it between now and July.

Jason L. Ware, MBA
Market Strategist, Chief Analyst
Albion Financial Group
(801) 487-3700; (877) 487-6200


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