U.S. economic growth accelerates in Q1 2019, growth not as strong as headline implies

The U.S. economic growth accelerated in the first quarter of 2019, in contrast to expectations. On an annualized basis, the economy grew 3.2 percent, an acceleration from 2.2 percent in the fourth quarter of 2018. Nevertheless, the acceleration was built on shaky foundations, as half of the quarter’s growth was because of a build-up inventories and a fall in imports, which meant net trade contributed one percentage point to growth.

Excluding these effects, final domestic demand rose at a softer rate of 1.5 percent in the first quarter, a modest deceleration from 2.1 percent in the fourth quarter.

Most of the softness in domestic demand was because of a soft consumer spending. As anticipated, PCE rose just 1.2 percent, less than half of the four quarter’s rate. Durable goods dropped 5.3 percent, after rising 3.6 percent in the fourth quarter. Spending on nondurable goods and services were also weak. Meanwhile, personal disposable income growth continued to be strong at 3 percent, so soft spending lifted the personal savings rate to 7 percent.

Business investment rose 2.7 percent, down from 5.4 percent in the fourth quarter, but still better than expected. Spending on intellectual property rose briskly, while equipment outlays eased to 0.2 percent gain. As expected, investment in structures dropped for the third consecutive quarter, on widespread falls.

Residential investment dropped 2.8 percent for the fifth straight quarter, entirely because of softness in single-family home construction. Other components of residential investment rose. Government spending rose 2.4 percent as strong outlays at the state and local level and on national defense, offset a 5.9 percent fall in nondefense federal spending, likely because of the government shutdown.

Exports growth was slightly stronger than expected, rising 3.7 percent; however, a 3.7 percent fall in imports signify that net trade added a full percentage point to growth. Finally, price pressures were also slightly weaker than expected in the first quarter, with the core PCE deflator up only 1.3 percent annualized.

The underlying growth is not as solid as the headline implies, as the stimulus from inventories and softness in imports are likely to be reversed in the second quarter, dampening economic growth, noted TD Economics. Meanwhile, the 1.5 percent rate of domestic demand was also held back by temporary factors like the government shutdown, as is likely to rebound in the second quarter.

“Today's report does not banish the downside risks looming in the global economy. It looks like the worst case scenario on the China-U.S. tariff escalation won't come to pass, but it is unclear if current tariffs will be lifted. Fiscal risks in Washington still loom as the year progresses”, added TD Economics.

At 14:00 GMT the FxWirePro's Hourly Strength Index of US Dollar was neutral at 35.3302 more details on FxWirePro's Currency Strength Index, visit http://www.fxwirepro.com/currencyindex