The U.S. economy grew at a 3.2% annualized rate in the first three months of the year, according to the first read on gross domestic product from the Bureau of Economic Analysis.
This surged ahead of expectations for 2.3% growth, according to consensus economist polled by Bloomberg.
In the fourth quarter, GDP grew at an annualized pace of 2.2%. Growth was 2% in the first quarter of 2018.
In its release, the Bureau of Economic Analysis noted that the increase in GDP in the first quarter “reflected positive contributions from personal consumption expenditures (PCE), private inventory investment, exports, state and local government spending, and nonresidential fixed investment.” Imports, which are subtracted from GDP, also decreased in the quarter.
With analysts looking for signs of inflationary pressures, the data showed prices remained contained.
Personal consumption increased 1.2% in the first quarter, higher than the 1% expected and the 0.5% annualized pace in the first quarter of 2018. However, that figure was lower than in the fourth quarter, when consumption grew at a 2.5% rate. Consumer spending comprises about two-thirds of U.S. economic activity.
Core personal consumption expenditures grew 1.3% on a quarterly basis, representing a slowdown from the 1.8% pace seen in the fourth quarter. Core PCE serves as the Federal Reserve’s preferred gauge of underlying inflation.
“While the strength in growth – and labor market data and financial conditions — points to no need for Fed easing, the move in core inflation is in the wrong direction from the perspective of Fed officials,” Jim O’Sullivan, chief U.S. economist for High Frequency Economics, wrote in an email Friday, referencing the central bank’s recent bewilderment with persistently below-target inflation despite low unemployment rates. “Net-net, we believe the Fed is firmly on hold.”
Following the report, stock futures reversed earlier losses, with contracts on the S&P 500 (ES=F) rising 0.15%, or 4.5 points, as of 9:16 a.m. ET. The U.S. dollar index (DX-Y.NYB) fell slightly, but has been on the upswing for the year-to-date, hitting the highest level since May 2017 on Thursday.
Improving expectations
Economists were looking for a solid first-quarter GDP print after several key sectors of the U.S. economy took a last-ditch turn higher at the close of the quarter.
Ahead of the release, expectations for first-quarter growth ran the gamut: The Atlanta Fed’s closely watched GDPNow tool tracked 2.7% quarterly growth, while the New York Fed’s NowCast report looked for 1.4% expansion.
Earlier this year, economists had braced for a protracted government shutdown, delayed tax refunds and adverse weather effects to hamper growth. In March, the Atlanta Fed tracked first-quarter GDP growth of as low as 0.2%.
March’s exceptional jump in retail sales had been a central focus in the recent optimism toward the economy given that consumer spending accounts for two-thirds of U.S. economic activity. Overall retail sales in the U.S. jumped 1.6% in March, marking the largest increase since later 2017. The “control” segment that factors into GDP readings – which excludes sales in the volatile auto, gas, building materials and food services categories – jumped a more-than-expected 1% for the month.
“It does come down to the consumer, and it always does for the U.S. economy, for the most part,” Marvin Loh, global macro strategist at, State Street said in an interview with Yahoo Finance ahead of Friday’s release.
Other recent data had also presaged solid first-quarter growth. Last week, the Commerce Department reported that the trade deficit narrowed more-than-expected to $49.4 billion in February, as exports jumped 1.1% and imports rose a sanguine 0.2%.
Inventory investments also boosted first-quarter expansion, as inventories grew a better-than-expected 0.3% in February and were upwardly revised for January.
However, many analysts noted that some of the key drivers supporting GDP growth this quarter will be cause for concern later this year.
“The first-quarter strength was principally due to three elements – all of which will be reversed in the second quarter and beyond. First, net exports added 1.0% point to overall GDP growth, as exports increased by 3.7% annualized and imports contracted by 3.7%,” Paul Ashworth, chief U.S. economist for Capital Economics, wrote in a note following the GDP report. “That won’t continue against a backdrop of very weak global trade.”
“Second, despite that massive boost from net trade, an acceleration in inventory building added an additional 0.7% points to GDP growth,” he added. “Normally those two components largely offset each other. With inventories elevated relative to sales, expect a reversal in the second quarter.”
The third factor was that the gain in final sales to domestic purchases tracked in this GDP print included a “very suspicious 3.9% gain” in government spending, which Ashworth attributed to a temporary spike in government investment in highways and road construction rather than a sustainable trend.
On Thursday, the Census Bureau posted an advance report stating that orders for durable goods, or those meant to last more than 3 years, rose by a better-than-expected 2.7% in March, the fastest rate in 7 months and higher than the 0.8% pace expected. Notably, non-defense capital goods orders, excluding aircraft, rose 1.3%, versus a 0.2% increase expected. The category serves as a proxy for business investment, suggesting that strong economic growth momentum could carry over into the second quarter.
