By Dean Baker
GDP grew at a 2.3 percent annual rate in the first quarter, its slowest pace since the first quarter of last year. (It is worth noting that there appears to be a negative first-quarter effect, with the quarter consistently showing slower growth than the rest of the year.) Weaker growth in consumption was the biggest factor in the slowdown, although flat growth in residential construction was also somewhat of a drag on growth. Investment grew at a modest 6.1 percent rate, showing no evidence of a tax cut induced speedup.
The weaker consumption growth was largely attributable to a falloff in vehicle sales. Vehicle sales had added 0.45 percentage points to growth in the fourth quarter, driven, in part, by replacement demand for cars destroyed in last summer’s hurricanes. This increase was almost entirely reversed in the first quarter as car sales subtracted 0.42 percentage points from first-quarter growth.
Services grew at a modest 2.1 percent rate adding 0.97 percentage points to growth. Spending on health care services grew at a 2.9 percent annual rate. There was also some uptick in health care inflation as nominal spending increased at a 6.5 percent annual rate. Still, over the last year nominal spending has only risen 4.9 percent, leaving its share in GDP virtually unchanged.
The slow consumption growth led to a modest rise in the saving rate from 2.6 percent in the fourth quarter to 3.1 percent. This is still an unusually low saving rate. It is likely driven, in part, by a wealth effect from high stock and housing prices, but it is more likely to go higher than lower in future quarters.
Consumption has been the leading component of GDP through the recovery. An improvement in the trade deficit in the downturn gave a boost to the economy, but there has been little clear trend in subsequent years. Investment has modestly lagged GDP growth, while the government share has trended downward after the initial stimulus ended. Its share is now just 90 percent of its prerecession level. Residential construction has trended modestly upward, but it is still more than 25 percent below its bubble share of output.
Consumption leads growth in recovery but investment and government spending both lag
The 6.1 percent growth in nonresidential investment was driven by a 12.3 percent jump in structure investment. This category is very erratic and can be largely reversed in future quarters. Investment in equipment and intellectual products rose at 4.7 and 3.6 percent rates, respectively.
The flat figure for residential construction follows a 12.8 percent jump in the fourth quarter. However, since construction had fallen the prior two quarters in 2017, the first-quarter figure is actually down by 0.1 percent from its year-ago level.
One disturbing item in this area was a reported jump in the price of residential construction of 8.5 percent at an annual rate. This number is erratic and there have been large jumps in prior quarters that were at least partly reversed in future quarters, but inflation in this category has been substantially outpacing overall inflation through the recovery. Higher prices may put a check on construction going forward.
Government spending grew at a 1.2 percent annual rate, adding 0.2 percentage points to growth for the quarter. Federal spending grew at a 1.7 percent rate, while state and local spending grew at just a 0.8 percent rate.
Measured in real terms, net exports rose modestly (were less negative), adding 0.2 percentage points to growth. However, the nominal trade deficit increased as higher oil prices offset the reduction in the size of the real deficit.
Overall inflation still seems well contained in most areas. The core personal consumption expenditure did rise at a 2.5 percent annual rate in the quarter, but it is still up just 1.5 percent over the last year.
On the whole, this report indicates that the economy remains on track to grow at a respectable pace through 2018. Without the drag from falling car sales consumption, it is likely to show stronger growth in future quarters. Growth in the other categories is likely to be comparable to what we see for the first quarter, which means growth for the rest of the year could be close to 3.0 percent.
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