April 29, 2019 / 9:43 AM / 2 months ago

Column: U.S. economy loses momentum despite impressive headline growth

LONDON (Reuters) - The U.S. economy showed clear signs of slowing during the first three months of the year, despite a much higher than expected figure for headline growth in gross domestic product (GDP) reported on Friday.

An aerial photo shows the Cap Jackson container ship, registered in Singapore, and the Seoul Express container ship, registered in Germany, at right, docked at Harbor Island at the Port of Seattle in Seattle, Washington, U.S. March 21, 2019. REUTERS/Lindsey Wasson

Real GDP expanded at an annualised rate of 3.2 percent in the first quarter, up from 2.2 percent in the previous three months, according to the advanced estimate from the U.S. Bureau of Economic Analysis.

Headline growth was more than twice as fast as the 1.4 percent predicted by the Federal Reserve Bank of New York’s nowcast model as recently as April 19, and faster than the 2.7 predicted by the Atlanta Fed on April 25.

But the details contained within the GDP report paint a much less healthy picture of the economy and confirm other indicators that suggest it continued to lose momentum at the start of 2019.

Consumer spending grew at annualised rate of just 1.2 percent, down from 2.5 percent the previous quarter, and a recent high of 3.8 percent in the second quarter of 2018.

Business investment in structures, equipment and intellectual property grew at a rate of just 2.7 percent, down from 5.4 percent the previous quarter, and a recent high of 11.5 percent in the first quarter of 2018.

SLOWDOWN

Inventory accumulation boosted headline GDP by 0.65 percentage points as businesses accumulated a large volume of extra raw materials, work in progress and unsold goods in the first three months of 2019.

But large inventory changes are normally reversed within a few months, so inventory reductions are likely to act as a drag on the headline growth rate in the next quarter or two.

Foreign trade also boosted headline growth by an unusually large 1.0 percentage points, the third-largest contribution since the end of the financial crisis.

(Chartbook: tmsnrt.rs/2DyEXPK)

But more than half of the contribution came from a sharp fall in imports, which accounting for almost 0.6 percent of GDP growth, the largest contribution since the fourth quarter of 2012 and before that the 2009 crisis.

Imports normally only make a positive contribution to GDP growth when they decline during periods of sluggish growth or recession, so the sharp reduction raises concerns.

The best gauge of the underlying momentum in the economy at home is the reported figure for real final sales to domestic purchasers, which excludes temporary inventory changes and erratic movements in foreign trade.

Final sales to domestic purchasers rose at annualised rate of just 1.4 percent in the first quarter, the slowest rate for more than three years.

Final sales to private domestic purchasers, which also excludes sales to the government and focuses only on consumer and business spending, was up by just 1.3 percent, the slowest rate for almost six years.

The GDP report is consistent with other indicators, including freight movements and purchasing managers’ surveys, all of which show the rate of growth has decelerated sharply since the middle of 2018.

John Kemp is a Reuters market analyst. The views expressed are his own.

Related columns:

- Global economy is close to stalling as trade falls (Reuters, April 26)

- U.S. economy hits soft patch, putting Fed on alert (Reuters, April 18)

Editing by Jane Merriman

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