The annualized Gross Domestic Product (GDP), growth rate in the second estimate of the first quarter (Q1), of 2017 was 1.15%, revised upward from the dismal 0.7% first estimate. Increases in nonresidential fixed investment and in personal consumption expenditures were larger and the decrease in state and local government spending was smaller than previously estimated. These revisions were partly offset by a larger decrease in private inventory investment.
GDP is a measure of the total production and consumption of goods and services in the U.S. This is the broadest measure of economic output. The Bureau of Economic Analysis (BEA), constructs two complementary measures of GDP, one based on income and one based on expenditures. GDP is measured and reported in chained 2009 dollars and in the 2nd estimate of Q1 was $16.8616 trillion. The growth calculation is misleading because it takes the Q over Q change and multiplies by 4 to get an annualized rate. This makes the high quarters higher and the low quarters lower.
Figure 1 shows the headline quarterly results since 2007 and the January International Monetary Fund (IMF), forecast through for 2017. The IMF forecast for the year 2017 is 2.3% GDP growth.
Figure 2 shows the contributors to GDP extended back through Q1 2007 and describes the quarterly change in the six major subcomponents. In the Q1 the negative contribution of Inventories pulled the overall number down by 1.1 points. Government spending added an additional negative 0.2 points. Positive contributors include: Personal consumption at 0.4, Fixed Non-residential Investment at 1.3, Fixed Residential Investment at 0.5 and Net Exports at 0.1 points. Growth in consumer spending was down sharply in Q1, impacted by a major snowstorm in the northeast which undermined utility and vehicle spending. Spending is expected to rebound in Q2 as the weather improves and pent-up demand kicks-in. Inventory build slowed a lot in Q1, which is a negative for the current quarter but a vote of confidence for the future. The strong dollar is making the US less competitive on the global stage, yet the trade component of GDP made little difference in Q1.
Figure 3 shows the slices of GDP as a pie chart for Q1 2017. This pie chart is not additive to 100. Adding the six major subcomponents of; Personal consumption + Inventories + Fixed Non-residential Investment + Fixed Residential Investment + Government + Net Exports = 100. Durable, Non-durable and Services are additive to Personal consumption.
Personal consumption at 69.3% was the largest component by far. It has averaged 68.1% over the last 41 quarters. Government accounted for 17.6%, down from its long term average of 19.2%. Fixed Non-residential Investment was next at 13.4%, higher than its long term average of 12.7%. Fixed Residential Investment represents 3.7%, greater than its 41 quarter average of 3.2%. Net exports which has made a negative contribution for all 41 quarters in our data, accounted for negative 3.6% in Q1. Its 41 quarter average was -3.2%.
The US economy has been expanding for almost 8 years now. The economy is at or near full employment. There are some signs of overheating due to tight labor markets and wage and price pressures, however both consumer and business confidence are high. This is consistent with a strong and growing economy.
At Gerdau we regularly evaluate the quarterly BEA GDP report to get a read on current economic strength as well as a “read” on the likely short-run future.