US GDP - better than the headline figure suggests

The latest data points to slowing momentum although the underlying picture seems more encouraging.

28 April 2017

Keith Wade

Keith Wade

Chief Economist & Strategist

US GDP slowed sharply in the first quarter, but the underlying growth picture remained solid. The US economy grew by just 0.7% (quarter-on-quarter annualised) in the first three months of the year.

This is a marked reduction from the 2.1% pace recorded in the previous quarter and slightly below expectations of a 1% rise.

Breakdown shows a mixed picture

The breakdown shows that household consumption barely grew as spending on durable goods dropped whilst inventories fell back to take nearly 1% off GDP growth.

On the positive side we saw strong gains in fixed investment while exports rebounded from a weak fourth quarter. Stripping out the volatile inventory component shows that final sales actually picked up to a 1.6% pace in the first quarter from 1.1% at the end of last year.

Seasonal adjustments may be faulty

These are still relatively soft numbers so do not entirely dispel the notion that the economy is losing momentum.

However, in our view there is ongoing evidence of faulty seasonal adjustment. On our analysis, the official numbers tend to understate growth in the first quarter of each year and on this adjustment growth was 2.4% annualised rather than 0.7%.

The same conclusion follows if we simply look at year-on-year numbers, which came in at 1.9%, barely different from the 2% for the fourth quarter of 2016.

Watch out for inflation

Where we might have more cause for concern is on the inflation side where we saw a rise in the GDP price deflator to 2.3% from 2.1% at the end of last year. Not too alarming but in the separate employment cost index report, released at the same time, we also saw a stronger-than-expected rise of 0.8%, taking the year-on-year rate up to 2.4%. These may be the first signs that the US is showing some late cycle inflation.

Important Information: This communication is marketing material. The views and opinions contained herein are those of the author(s) on this page, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. This material is intended to be for information purposes only and is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. It is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. Past performance is not a reliable indicator of future results. The value of an investment can go down as well as up and is not guaranteed. All investments involve risks including the risk of possible loss of principal. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. Some information quoted was obtained from external sources we consider to be reliable. No responsibility can be accepted for errors of fact obtained from third parties, and this data may change with market conditions. This does not exclude any duty or liability that Schroders has to its customers under any regulatory system. Regions/ sectors shown for illustrative purposes only and should not be viewed as a recommendation to buy/sell. The opinions in this material include some forecasted views. We believe we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know. However, there is no guarantee than any forecasts or opinions will be realised. These views and opinions may change.  To the extent that you are in North America, this content is issued by Schroder Investment Management North America Inc., an indirect wholly owned subsidiary of Schroders plc and SEC registered adviser providing asset management products and services to clients in the US and Canada. For all other users, this content is issued by Schroder Investment Management Limited, 1 London Wall Place, London EC2Y 5AU. Registered No. 1893220 England. Authorised and regulated by the Financial Conduct Authority.