U.S. economic growth remains strong, but not quite as robust as this morning’s gross domestic product (GDP) report suggests.
The Bureau of Economic Analysis reported U.S. GDP—the widest measure of the nation’s economic activity—grew at a 3.2 annualized rate in the first three months of 2019, up from its 2.2 percent pace of growth in the previous quarter. However, 0.7 percent of today’s gains came from the accumulation of business inventories, a quite volatile and hard-to-interpret component of GDP. Final sales of domestic product rose just 2.5 percent.
One full percentage point of this growth was driven by a rise in net exports (a falling trade deficit). Against the backdrop of a growing trade deficit in recent years this reversal is welcome, but it is unclear if it will be sustained, particularly as the rest of the global economy seems to be slowing.
It has been widely expected that we will see a slowdown in the pace of growth from the previous year, as the fiscal stimulus the economy received fades. (Most of this stimulus stemmed from higher spending levels in 2018, but a bit stemmed from the implementation of the tax cuts passed at the end of 2017.) The first quarter growth number reported today indicates that this slowdown will at least be postponed.
Nonresidential business investment slowed markedly in today’s report, growing at just 2.7 percent. Given that greater investment is the linchpin for theories about how the 2017 tax cut was supposed to eventually lead to higher wage gains for U.S. workers, weak investment performance since its passage should be seen as quite damning.
Today’s data confirms that price inflation remains tame, with the measure of inflation most closely watched by the Federal Reserve (the price deflator for personal consumption expenditures excluding food and energy prices) growing just 1.7 percent over the past year—again undershooting the Fed’s 2 percent target and posting a second straight quarter of deceleration.
Today’s report is essentially a status quo indicator. The economy is growing, but hardly at a torrid pace. Tame inflation argues that efforts to boost growth by taking up more demand-slack are warranted, as they could lead to wage gains and greater equity of outcomes in the labor market without risking unacceptable inflation. At a minimum, today’s report gives no reason for the Federal Reserve to reverse their implied course of no further rate increases this year.