First quarter growth goes from lackluster to dismal
The newest estimate by the Bureau of Labor Statistics says the US economy grew at an annual rate of 1.8% in the first quarter. Previously, growth was earlier reported to be 2.4%.
There were two main drivers to the downward revision: growth in consumer spending, which fell to 2.6% from 3.4%, and business investment, which fell to 0.4% from 2.2%.
There’s a chance that slower than estimated consumer spending in the first three months of 2013 may have improved in the second quarter (consumer confidence just reached its highest level in five years). Still, the 0.6 percentage point drop in first quarter growth is bad news for the US economy, where, as Sober Look put it, “the consensus seems to be that the US consumer will come to the rescue once again”.
Sober Look points the Econoday chart below and notes that consumer sentiment shot up in May. Today’s revision in consumer spending indicates that sales might not be following sentiment:
Compared to the discrepancy between downward consumer spending revisions and rising current consumer confidence, the 1.8 point drop in the business spending number is more in line with more recent corporate data points. The mood among business managers isn’t as dour as today’s numbers, but it’s much more restrained than consumers’ current optimism. Earlier this month, a survey by the Business Roundtable showed that CEOs expected an essentially unchanged rate of 2.2% economic growth in the second quarter. The report was summarized with this cautionary statement: “Overall, CEOs see the US economy still on a slow road to recovery”.
Today’s revised GDP estimate seems to justify that view. Somewhat perversely, markets are up slightly. Bad news for the economy is good news for some on Wall Street: it means the Fed is presumably less likely to slow its monetary stimulus. As Agnes Crane wrote last month, this seems to be a key feature of the central bank’s quantitative easing: while it’s good for financial markets, it’s having little effect on the economy.