Data Indicates Q1 USD GDP Contraction A Statistical Blip

by: Hale Stewart

By Hale Stewart

Yesterday's -1% reading for Q1 U.S. GDP growth has created concern that the economy may be entering a period of slower growth. There are several reasons this concern is unfounded.

First, consider the effects of winter weather on the Q1 reading. This was noted by Fed Chair Yellen in her latest testimony:

Although real GDP growth is currently estimated to have paused in the first quarter of this year, I see that pause as mostly reflecting transitory factors, including the effects of the unusually cold and snowy winter weather.

The most recent Beige Book also made reference to this in several spots. And finally, the anecdotal comments to several ISM manufacturing reports in the first quarter specifically mentioned winter weather as delaying delivery times. In short, there's a fair amount of evidence that the Q1 reading was transitory.

Then there are the internals of the report itself. Personal consumption expenditures increased 3.3%, with durable goods increaing 1.4%. While the durables number was down from 2.4% in the 4th quarter it was still positive and was probably slowed as well by the weather (who wants to buy a car when you're waist deept in snow?). Outdoor economic activity such as nonresidential and residential investment both decreased as did equipment investment. However, intellectual property investment (an indoor activity) was up 5.1%. Exports did drop, but, again, these have to typically be delivered from the interior to a port.

And then there's the four primary coincident U.S. economic indicators: industrial production, personal income less transfer payments, manufacturing and trade sales and total employees. As this chart from the FRED data system show, all four are moving higher:

And finally there's the leading economic index as published by the Conference Board which is still positive and rising:

This does not mean the U.S. economy is out of the woods by any stretch of the imagination. Broad measures of the labor market indicate a lack of confidence on the part of businesses and a large amount of labor underutilization. The housing market has been hit by higher interest rates, slowing growth. As my co-blogger NDD has noted corporate profits after taxes (a long leading indicator) have turned negative.

But the bulk of the data indicate the Q1 reading was a blip on the radar screen, at least for now.

Hale Stewart,