Wednesday, 20 of June of 2018

Economics. Explained.  


June 10, 2018

The first revised estimate for first quarter GDP came in at 2.2% compared to an initial reading of 2.3% and a 2.9% growth rate in the fourth quarter.  For 2017 as a whole GDP rose 2.6%.  We expect GDP growth of 3.0% this year.  What is interesting in this report is that the downward revision was entirely caused by a reduction in the pace of inventory accumulation.

Final sales, which is GDP excluding the change in business inventories rose 2.0% in the first quarter after revision versus a preliminary reading of 1.9% and a solid 3.4%  pace in the fourth quarter.   Over the past year final sales have risen 2.7%.  In the first quarter inventories rose $20.0 billion after revision compared to an earlier estimate of $33.1 billion and an increase of $15.6 billion in the fourth quarter.  Thus, inventories  added 0.2% to  GDP growth in the first quarter.  Inventories are expected to rise by roughly $30 billion per quarter in the quarters ahead.

Final sales to domestic purchasers excludes both the change in inventories and trade rose by 1.9% in the first quarter upon revision which is stronger than the 1.6% preliminary estimate and a 4.5% growth rate in the fourth quarter.  Over the past year this series has risen at a 2.8% pace.  The deficit for net exports narrowed by $3.0 billion which means that the trade component added 0.1% to GDP growth  in the first quarter as exports rose 4.2% while imports climbed by 2.8%.

Consumption spending rose 1.0% in the first quarter but that follows a steamy 4.0% growth rate in the fourth quarter.  We expect the pace of consumer spending to remain steady and  increase 2.5% in 2018.  Solid employment gains should boost  income.  The rising stock market and increase in house prices will boost net worth.  Expected individual income tax cuts should further stimulate spending.  Everything related to the consumer seems quite solid.

Nonresidential investment jumped by 9.2% in the first quarter which compared to an initial estimate of 6.1% and a 6.8% pace in the fourth quarter.  The upward revision in this category was primarily responsible for the upward revision to final sales.  For 2017 nonresidential investment climbed 6.3%.  We expect nonresidential investment to  increase 6.8% in 2018 as business regains confidence in the wake of expected corporate tax cuts, relief from an onerous regulatory burden,  and some repatriation of earnings from overseas.

Residential investment declined 2.0% in the first quarter after having jumped 12.8% in the fourth quarter.   For 2017 as a whole residential investment rose 2.6%    While demand remains strong, builders are having an increasingly difficult time finding qualified workers which curtails growth in this category.   We expect residential investment to  increase 2.1% in 2018.

The foreign sector as measured by the deficit for real net exports narrowed by $3.0 billion in the first quarter to -$650.9 after having widened by $56.4 billion in the fourth quarter.  Exports rose 4.2% in the first quarter while imports climbed 2.8%.  We expect the deficit for net exports to have no impact on  GDP growth at all in 2018.

Federal government spending rose 1.7% in the first quarter after having climbed by 3.2% in the fourth quarter.  Federal government spending is expected to rise 3.7% in 2018 as President Trump increases defense spending while non-defense spending is relatively unchanged.

Following GDP growth of  2.6% in 2017 we expect growth of  3.0% in 2018 given the individual and corporate tax cuts and some repatriation of earnings from overseas.

Stephen Slifer


Charleston, SC

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