The Market Today
U.S. Economy Grows 0.7% in 1Q as Consumer Slows and Inventory Drags
by Craig Dismuke, Dudley Carter
Today’s Calendar – First Quarter Growth Slows to 0.7% as Slower Consumption and Government Spending, Weaker Inventories, Offset Better Business Fixed Investment: As expected given historical trends, the pace of U.S. economic growth slowed in the first quarter of 2017 from the previous quarter’s pace of 2.1%. Total growth of 0.7% was below the consensus estimate and the weakest quarter for the U.S. economy since a 1.2% contraction in the 1Q 2014. Personal consumption was a major contributor to the slowdown, falling from 3.5% in 4Q 16 to just 0.3% in 1Q 17. This marked the weakest quarter for the consumer since the final quarter of 2009. The slowdown was broad based and impacted nearly every category of consumer purchases. As expected, spending on both autos and utilities contracted in the first quarter. Auto buying fell 16.1% to help drive an overall 2.5% decrease in durable goods consumption. Consumers spent more on food and beverages in the first quarter but at the expense of clothing and gasoline. Spending on services remained positive except for the weather-driven decline in utilities, however the pace slowed in almost every category.
As to private investment, fixed investment was stronger across the board. Business spending on structures rose 22.1% in the 1Q to lead the way. Equipment purchases gained 9.1% and intellectual property improved 2.0%. The improvement in fixed investment is consistent with the indications from the capital goods shipments data. Housing was also a positive contributor, rising 13.7% compared to 4Q’s 9.6% gain. However, the overall contribution from investment was weighed down by a negative contribution from inventories. The net effect of fixed investment’s 1.6% contribution and inventories -0.9% detraction was an overall 0.7% contribution from the investment category.
In other categories, external trade was nearly neutral as a 5.8% improvement in exports combined with a 4.1% gain in imports to drive a minimal 0.1% contribution to headline growth from global trade flows. Government spending dragged 0.3% from headline growth thanks to negative contributions from national defense consumption and state and local fixed investment.
The important employment cost index rose 0.8% in 1Q 17, faster than the 0.6% expected and the biggest quarterly gain since 2007. The measure is heavily followed for its all-encompassing read on how much employees are costing U.S. businesses. Actual wages rose at an 0.8% pace while the cost of employee benefits increased 0.7% to net a 2.4% all-in cost increase from a year ago, the strongest YoY pace since 1Q 15. This data confirms the recent wage pressure seen in the hourly earnings data.
Bottom Line: Growth was weaker-than-expected but the 1Q slowdown in personal consumption and inventory accumulation could bode well for 2Q GDP. The other read on business spending was positive. Markets will focus on leading indicators for signs the economy looks to be picking up from the 1.5% pace of final sales to domestic purchasers. And the Fed will be focused on wage pressures given the gains in the employment cost index. Further gains in pay for U.S. employees will likely be the driving force of the Fed’s path.
Overnight Activity – Eurozone Inflation Jumps as Markets Await U.S. GDP: Global equities traded mixed overnight although the directional bias seems tilted slightly to the downside. Sovereign yields also moved unevenly as lower yields in Asia gave way to rising borrowing costs for European sovereigns. The BoJ left its policy unchanged yesterday and lowered its forecast for inflation. The first piece of hard data since that decision showed core core inflation (ex-fresh food and energy) fell 0.1% YoY, the first deflationary reading since July 2013, despite the jobless rate holding at its lowest level since the summer of 1993. Inflation was also in focus in Europe. Headline inflation in the Eurozone bounced back to 1.9% in April and core inflation rose a faster-than-expected 1.2%, the strongest pace since early 2013. The Euro spiked, nearing its weekly high from Tuesday which was the strongest since November. Ahead of this morning’s GDP data, U.S. equity futures were essentially flat, the Dollar was weaker as a result of the trade up in the Euro, and Treasury yields were higher by roughly 1 bp across the curve.
Yesterday’s Trading – Markets Mostly Unchanged Except for Another Nasdaq Record: U.S. stocks edged out a daily gain as Treasury yields inched lower and the Dollar was capped by strength in the British pound. Crude prices fell but significant pared early losses that had sent the commodity to its lowest level since late March. The Nasdaq was the best performer of the major three indices as a daily 0.4% gain sent the tech-heavy index to its second record high of the week. The Dow and S&P saw only marginal gains. The Euro remained weaker as markets dovishly interpreted the ECB’s decision and Draghi’s press conference remarks. The 2-year yield fell 1.4 bps to 1.26% as the 5-year and 10-year notes dropped less than 1 bp to 1.82% and 2.30%, respectively. The curve’s steepness between 2s and 10s has held mostly constant over the last several weeks in a range of 1.03% to 1.05%.
Pending Home Sales Slip: The number of new contracts signed for the purchase of an existing home fell 0.8% in March after a healthy 5.5% jump in February. The result was 0.2% better than the 1.0% decline expected. Sales fell in three of four regions and the pace of gains in the south slowed. Over a year ago, pending sales were 0.5% better. On average, 42% of homes put under contract were done so at a price point above the list price; another data point confirming the tight supply metrics and steady price increases. All told, the pending sales index has continued to move mostly sideways since the summer of 2015.