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U.S. Economic Commentary and Forecasts: Three Perspectives

The U.S. economy roared back in the first three months of the year, evident in the 5.8% annualized advance in Real GDP. Growth in Q1 was the fastest quarterly advance in four years, and ran far ahead of revised (upward) consensus estimates.

Equally impressive was the composition of growth. Real consumer spending jumped 3.5%, about half as fast as the Q4 performance, but still a relatively strong showing given that sales of motor vehicles tumbled almost 30% following the record sales late last year. Housing jumped 15%, the strongest quarterly gain in 8 years, thanks in part to very low interest rates and unusually mild weather. Defense spending jumped 20%, much more spending seems to be in the pipeline given that order bookings for military contractors are up 16% over year ago levels.

Investment spending was weak, but not in the much maligned tech sector. Nonresidential structures took a big tumble, owing to the fact that many projects have been delayed or stalled as builders failed to secure insurance against terrorism. Business purchases of motor vehicles were also weak due to less travel. Surprisingly, business spending on information processing and related equipment rose at a 7.5% annualized rate in Q1, but when expressed in nominal dollars spending was essentially flat on a sequential quarter to quarter basis and off sharply from year ago levels.

The swing in the business inventory component accounted for about half of the rise in Q1 GDP. But that should not be surprising since in every economic recovery over the post war period, the swing inventory positions have been a powerful and important contributor to economic growth. On average, the swing in inventory positions usually accounts for about half of the first year's gain in Real GDP, so the lift from in inventories in Q1 was in line with the historical performance. Even though the contribution from the inventory component was fairly large in Q1 business inventories were still liquidated, only at a slower rate than what occurred in Q4. That's encouraging because the big lift to production and jobs still lies ahead.

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