Weak Q1 growth data hides positive underlying momentum

The weakness of first quarter GDP growth is unlikely to last, and we note that underlying details regarding future growth are encouraging.

Two items were responsible for last quarter’s weakness. One is consumer spending growth, which slowed to just 0.3%. A second weakness were inventory data, which diminished the headline GDP growth number by 0.9 percentage points. We believe that both items are likely to improve, given that consumer confidence is at business cycle highs, households’ balance sheets are strong and wage growth is accelerating, as suggested by the employment cost index.

Also, the carry over from weak first quarter inventories is positive for current quarter growth, and we note that according to the latest manufacturing ISM, inventories are rising (to 51.0 from 49 previously). As to the manufacturing sector, business conditions remain favourable, according to the ISM survey. We note that growth remains very broad based, with 16 out of 18 manufacturing sectors reporting expansion.

Gero Jung – Chief Economist – Mirabaud AM