As Expected, First Quarter GDP Clunker, Second Quarter Metrics Solid
- Real Gross Domestic Product growth was barely positive at a 0.1 percent annualized rate.
- The ADP Employment Report for April showed a solid gain of 220,000 private-sector jobs for the month.
- The Case-Shiller 20-City Composite House Price Index was up 12.9 percent in February from a year ago.
The first estimate of 2014Q1 real GDP growth was a clunker, as expected. Real GDP growth for the first three months of 2014 registered a barely positive 0.1 percent, essentially no growth. Four factors lined up to suppress first quarter GDP. (1) The severe winter weather shifted personal consumption patterns and restrained fixed investment; (2) Nonfarm inventories corrected after surging through the second half of last year; (3) Exports fell, so net trade was a drag; and (4) Government spending fell, exacerbated by the federal spending sequester. It is very important to note that all four negative factors are temporary and expected to abate soon. GDP is a backward looking report. Leading indicators for the U.S. economy are going in the right direction and we expect real GDP growth for the remainder of 2014 to show a significant improvement from the anemic first quarter.
Overall personal consumption expenditures for the first quarter actually increased at a strong 3.0 percent rate. However, the pattern of personal spending was significantly shifted due to the very bad weather. Spending on durables goods (like cars and appliances) increased at a very weak 0.8 percent annual rate. Personal spending on services (including home heating) surged at a 4.4 percent annual rate. Business fixed investment declined at a 2.1 percent annual rate, as investment in both structures and equipment contracted. Residential investment (including house building) declined at a 5.7 percent annual rate. Inventory accumulation renormalized in 2014Q1 after two consecutive above-normal quarters in 2013Q3 and Q4. Inventories subtracted about 0.6 percent from headline GDP growth in the first quarter of 2014. Exports of goods declined sharply at a 12 percent annual rate in Q1. Exports may have been held back by bad weather too. Increasing energy exports are expected to help the U.S. trade balance going forward. Net trade subtracted 0.8 percent from headline GDP in Q1. Government spending shrank at a 0.5 percent annual rate in Q1 with drags from both federal defense spending and state/local government spending. Federal spending will no longer be a drag on GDP in the second half of this year.
Forward-looking good news came this morning in the form of a solid ADP Employment Report for April. According to ADP, private sector employment increased by 220,000 workers in April. This is the third consecutive increase in the ADP jobs numbers since a very weak January report. We expect to see a similar number (around 200,000) when the official Bureau of Labor Statistics jobs report for April comes out this Friday morning.
The Case-Shiller 20-City Composite House Price Index for February increased by 12.9 percent. On a monthly basis the index was unchanged for February. The weather-beaten housing market is expected to improve through the spring. Both mortgage applications for the end of March into early April, and the Pending Home Sale Index for March have firmed up.
Market Reaction: Equity markets opened with losses, but have recovered. The 10-year Treasury bond yield is down to 2.68 percent. NYMEX crude oil is down to $99.80/barrel. Natural gas futures are down to $4.79/mmbtu.
For a PDF version of this Comerica Economic Alert click here: GDP 04-30-14.