Yes, The First-Quarter GDP Figure Was An Anomaly

by: Hale Stewart

We've seen a fair amount of hyperventilating about the final Q1 GDP number printing a negative 2.9%. However, let's take a deep breath and look at the facts and data to get an idea not only of what happened, but what will continue.

Let's start with this: assume for a minute the weather is very cold and unpredictable. In fact, it's unseasonably cold, even for northern regions. What wouldn't happen in this environment? Anything that involved a person going out to get something aside from necessities. Any outdoor activities like building are also off the table. And businesses adding to their capital stock will occur at a far slower rate, because adding to property, plant and equipment requires the movement of large items from point a to point b, which is difficult to do when the nation's entire logistics chain is getting hit by inclement weather.

Let's look at the details of the report:

Real GDP declined 2.9 percent in the first quarter, after increasing 2.6 percent in the fourth. This downturn in the percent change in real GDP primarily reflected a downturn in exports, a larger decrease in private inventory investment, a deceleration in PCE, and downturns in nonresidential fixed investment and in state and local government spending that were partly offset by an upturn in federal government spending.

In other words, those activities that involved contact with the outside have slowed down because of the weather.

By way of comparison, consider this excerpt from the latest Canadian GDP release:

Final domestic demand was down 0.1% in the first quarter, as lower business gross fixed capital formation offset increased household final consumption expenditure. Government final consumption expenditure was 0.1% lower.

Household final consumption expenditure rose 0.3%, the smallest gain in four quarters. Increased spending on non-durable goods (+1.0%) more than offset decreased spending on durable and semi-durable goods. Outlays on services were up 0.2%.

Business gross fixed capital formation was down 0.9%, the third decrease in five quarters. Business gross fixed capital formation in residential structures declined 1.6%, with new home construction (-1.5%) and ownership transfer costs (-6.4%) both down. Business investment outlays on plant and equipment decreased 0.5%.

Businesses investment in inventories was $16.4 billion in the first quarter, down from $16.8 billion in the previous quarter, primarily as a result of lower investment in farm inventories.

Exports fell 0.6% despite a 3.8% increase in exports of energy products. Exports of goods were 0.8% lower while those of services rose 0.6%. Imports of goods and services fell 1.9%.

The shortcomings in the report - PCEs, investment and exports - mirror the US's GDP report. And here's how the Canadian Central bank described their first-quarter growth:

"The Canadian economy grew at a modest rate in the first quarter, held back by severe weather and supply constraints."

Let's move forward to the Q2, starting with the leading economic indicators from the Conference Board:

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Last month, the negative contributions came from manufacturing-related numbers, while the monetary numbers (interest rate spread, stocks, etc.) were positive. Because we're in a balance sheet recovery, the efficacy of the mechanism of transferring low rates into economy effect is diminished. However, last month, 9 of the 10 indicators were positive - a far broader swath of numbers, and obviously positive.

And then there are the positive ISM numbers for both the manufacturing and service sectors:

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While the numbers were low at the start of the year, they have been rising solidly since.

And then, there are the coincident indicators which are shown in this graph:

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All are moving higher.

I'm certainly not expecting a huge, blowout Q2 number by any means. But, there is simply no basis in the data to conclude the Q1 was anything but a one-off quarter at this point.

Hale Stewart,