First quarter GDP data just came out and growth is up—2.5% (seasonally adjusted) compared to a paltry 0.4% in the fourth quarter of 2012. Yet despite the better number, many economists still say the first quarter is a disappointment because it came in below expectations. Indeed, Beacon Economics had expected growth in the 3% range.
But, as always, there are a few things to keep in mind about the data before analyzing what is going on. First, this is only the initial release. The first release of fourth quarter 2012 data showed the U.S. economy contracting by -.1%, but the final result came in at +.4%, a full half-point swing. The reason for the shift is simple: The advance estimate is made without certain data, including March data on trade and inventories. When these data come in, things will shift around.
Second, the headline number is not what is important if trying to figure out what’s coming next since much of the data is highly volatile and tends to quickly return to long run averages. Inventories are the worst offender on this count: 1.5% was subtracted from growth in the fourth quarter of 2012, and one full percent was added back in the first quarter of 2013. There is little point in allowing this to sway your opinion.
So what do the important numbers tell us? One thing they tell us is that private sector demand has started to firm up. Growth in consumer spending, business investment, and residential consumption added almost 3% to growth in both the fourth quarter of last year and the first quarter of this year – which is considerably better than during the middle of 2012. And while the trade deficit expanded a bit, which subtracts from growth, at least both imports and exports were up—a sign that the slowdown in trade bottomed at the end of last year.
Also of interest is what has happened with defense spending. The sequestration cuts on the non-defense side are just starting to bite—witness the chaos at the airports. But the U.S. Defense Department is way ahead of the game. Spending on defense is down by an annualized equivalent of $60 billion since the third quarter of 2012—more than what was required under sequestration. While the full secondary impacts of these cuts have yet to be fully felt in the broader economy, at least this part of the cut is already done.
Add it up and the U.S. economy looks solid enough to continue growing over the next couple of quarters. Beacon Economics expects business investment to pick up somewhat next quarter, even as consumer spending softens. Federal spending will subtract a bit from growth, meaning that a close-to-3% year is still in the cards—at least for now. Stay tuned.