BEA Estimates 1st Quarter 2018 GDP Growth At 2.32%

The Numbers 

As a quick reminder, the classic definition of the GDP can be summarized with the following equation 

GDP = private consumption + gross private investment + government spending + (exports - imports)

or, as it is commonly expressed in algebraic shorthand 

GDP = C + I + G + (X-M)

In the new report the values for that equation (total dollars, percentage of the total GDP, and contribution to the final percentage growth number) are as follows 

The quarter-to-quarter changes in the contributions that various components make to the overall GDP can be best understood from the table below, which breaks out the component contributions in more detail and over time. In the table below we have split the "C" component into goods and services, split the "I" component into fixed investment and inventories, separated exports from imports, added a line for the BEA's "Real Final Sales of Domestic Product" and listed the quarters in columns with the most current to the left 

Summary and Commentary 

It can be argued that the headline number materially overstates the actual growth rate of the US economy. All of the BEA's three major "smoke and mirrors" components seem to be in play for the first quarter of 2018: inventories, imports, and deflators. At key economic inflection points those three components can become closely coupled, with lagging price discovery compounding reported inventory and import swings. 

The major takeaways from this report are 

-- Consumer spending for goods contracted during the quarter. 

-- The annualized growth rate for overall consumer spending dropped over -2%. 

-- The growth rates for everything not inventories or imports weakened materially. 

-- Although household disposable income improved (because of reduced withholding rates in the "Tax Cuts and Jobs Act of 2017"), most of that improvement went into increased savings. During the first quarter of 2018 households were showing signs of budgetary stress. 

-- The BEA's deflators may once again be boosting the headline number, in this case by +0.50%. 

The US economy is not quite as robust as the BEA's headline number might suggest. A +2.32% headline would generally be a good thing. But unfortunately, weakening domestic demand is causing inventories to soar and imports to crash -- which in the BEA's calculus are boosting what would otherwise be a much weaker headline number. 

Although upcoming revisions might tell a different story, this report painted a picture of an economy in transition to materially lower growth. 

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