Location: Toronto
Author: RBC Economic Staff
Date: Thursday, April 30, 2009
The first, or advance, estimate of first-quarter U.S.GDP was weaker than expected, dropping an annualized 6.1%, not much better than the 6.3% drop in the fourth quarter of last year. Going into the report, expectations were centred around a more moderate drop of 4.7%.
The unexpected weakness was concentrated in both residential and business investment along with government spending. With respect to the latter component, although the weakness on the state side may continue going forward (because of limits on deficit spending), the federal government is less constrained with earlier-announced fiscal stimulus measures likely to see this weakness reversed in subsequent quarters.
Implications
Going into the release, optimism about an easing in the pace of decline largely reflected indications that consumer spending rebounded from a 4.3% tanking in the fourth quarter. Today’s report more than confirmed this optimism with this key expenditure component recording an annualized increase of 2.2%, which was double expectations.
However, this unanticipated strength was more than offset by more pronounced weakness in non-residential structures (-44.2%), residential investment (-38%), and government spending (-3.9%). The first component took off a full percentage point more from overall GDP growth than we had expected going into the release.
Inventories were also a major drag on growth subtracting 2.8 percentage points from the gain in GDP; we had been monitoring a subtraction of 2.5 percentage points. The drop in inventories represented a record amount and augurs well for an improving trend in growth going forward as any increase in demand will increasingly need to be met by new production.
Exports dropped a sizeable 30%, although imports fell an even greater 34.1%, resulting in net exports providing a two percentage-point boost to growth. Our expectation had been for a 1.3 percentage-point add in the quarter.
Growth in the core PCE deflator, the key inflation measure in the GDP report, rose to 1.5%, up from a 0.9% rise in the fourth quarter, although down from a 2.4% gain in the third quarter.
The unexpected depth of decline in first-quarter GDP is disappointing.
Although the extent of weakness in government spending is not likely to persist going forward and the low level of inventories bodes well for future growth, monetary conditions will need to remain accommodative to reverse the weakness in investment spending and to keep consumer spending in the positive growth column,. This is expected to result in the central bank reiterating in its announcement following the conclusion of this afternoon’s FOMC meeting that the current very low band of Fed funds of between 0% to 1/4% will continue to be maintained “for an extended period.”
More attention will be focused on any indication that the central bank is expanding its credit and quantitative easing initiatives. The Fed committed US$300 billion towards the purchase of long-term government Treasuries following the conclusion of the last FOMC meeting March 18.
Although this prompted an initial drop in yields, these lower rates have not been sustained, with the current 10-year yield of 3.00% close to what prevailed going into that last FOMC meeting.
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