GDP growth slows to 1.6% in first quarter, exaggerated by volatile trade and inventory data

REAL ECONOMY BLOG | April 25, 2024

Authored by RSM US LLP

Overall growth in U.S. gross domestic product fell to 1.6% in the first quarter, but the slowdown was exaggerated by volatile trade and inventory data, which provided a 1.2% drag on overall activity.

Final sales to domestic purchasers, by contrast, which exclude inventories and trade, increased by 2.8%, and final sales to domestic private purchasers, which excludes government, inventories and trade, advanced by 3.1%. Real final sales increased 2% on the quarter, according to data released by the Commerce Department on Thursday.

The condition of the private sector remains strong, and we expect the economy to slow to an overall 2.4% pace of growth this year

Still, even after adjusting for the volatile data, the U.S. economy is slowing, which carries important policy implications.

First, the economy continues to grow above the long-term sustainable trend of 1.8%, but it is not overheating. Estimates of a sustained surge in inflation are as exaggerated as the top-line slowdown in GDP might suggest. The economy is not overheating and the Federal Reserve’s forecast of a reduction in its too-restrictive policy rate remains intact.

Second, that underlying strength in the private sector implies that the Federal Reserve will be patient in cutting rates. We expect that the central bank will cut rates in September and provide two 25 basis-point cuts this year, with the other being in December.

The data

The underlying data in the GDP report reflects the rock-solid economic activity that has been on display inside other high frequency data.

Personal consumption increased by 2.5% while government consumption advanced by 1.2%. Both look a bit light given other data and are likely to be revised upward in the second and third estimates of GDP.

In particular, the decline of 0.4% in goods sales overall and 1.2% in durable looks quite soft and not aligned with other data.

Service demand increased by 4% on the quarter and looks much more like what would have expected given personal spending and retail sales data.

Gross private investment increased by 3.2% on the back of a 13.9% increase in residential investment and a 2.9% rise in non-residential investment.

The most impressive element in the report was a 5.4% increase in productivity-enhancing intellectual property and a 2.1% increase in outlays on equipment.

Exports advanced by 0.9% and imports grew by 7.2%, which makes that decline in durables look quite suspicious.

Government spending increased by 1.2% mostly because of a 2% increase in state and local activity. Federal spending declined by 0.2% and nondefense spending advanced by 0.3%.

Inventory accumulation eased from $54.9 billion to $35.4 billion while net exports increased from -$918.5 billion to $973.2 billion.

The takeaway

Domestic private economic activity remains strong despite the large drag from volatile inventory and trade data. We generally expect the first quarter household consumption and government spending data to be revised upward and top-line growth to be revised above the sustainable long-term growth trend of 1.8%.