Around the world, things are looking a little shaky. South Korea’s GDP just shrank unexpectedly. Germany is barely growing, dragging down an already sickly euro-zone economy. Japan is sputtering.
America, however, is going gangbusters.
In the first quarter of 2019, the US economy grew by 3.2%, the zippiest pace of first-quarter growth since 2015.
That’s fast by world standards, and also a much brisker clip than economists expected—most forecasts topped out just over 2% growth for the first quarter. After all, headwinds were blowing—notably, a government shutdown in January and uncertainty about tax refunds. Plus, for the past couple quarters, the economy has seemingly been coming down from the “sugar high” of Trump’s tax cuts and a boost in government spending.
But all might not be as rosy as it seems. “Looking beyond the headline number… here are plenty of causes for concern,” wrote Paul Ashworth, economist at Capital Economics, in a research note. That’s because the main forces behind first-quarter strength are temporary and, in fact, will likely reverse throughout the rest of 2019, noted Ashworth.
Take, for example, trade. While exports leapt nearly 4%, sluggish domestic demand dragged imports down by 3.7%. However, global trade is imploding—in the three months to February, world trade volume contracted 1.9%, the sharpest drop since May 2009 (pdf). That suggests the US can’t really count on net exports to buoy growth in the rest of 2019.
Another big driver of first-quarter growth was an unexpected surge in inventories, or the goods produced by companies but not yet sold. Although building up stocks could signal that companies expect future demand to increase, it could also mean that unsold goods are piling up because demand is flagging. The inventory measure is a volatile quirk of GDP accounting; it doesn’t definitively tell us much about underlying business activity.
Strip those noisier elements out of the latest GDP report, and it turns out private-sector spending slumped to a 1.3% pace—the weakest quarterly growth since 2013 (paywall). Consumer spending—the critical engine of economic growth, accounting for a whopping two-thirds of US GDP—rose a mere 1.2% in the first quarter, down from the 2.5% growth pace in the quarter before.
Meanwhile, business investment rose by only 2.7%, and most of that was due to a big boost in investment in intellectual property products (the value of which is likelier to flow to shareholders than to contribute much to the real economy).
While today’s GDP print reveals that recession agita has been overblown, it also isn’t great news for the US economy. The factors that made for robust headline growth in the first quarter will likely drag on growth in the coming quarters, according to Oxford Economics economists Lydia Boussour and Gregory Daco, though this may be offset by a revival in consumer spending.
It might work out nicely for Donald Trump, though. If growth does eventually ebb, by late 2019 the Federal Reserve might be forced to start cutting rates, says Capital Economics’ Ashworth.
In other words, Trump gets a tweet-friendly GDP figure to boast about today and, down the line, the rate cuts he’s been baying for of late. Winning!