Economic highlights (United States) - 02/05/2014

US: The "Yikes" in Growth...

-        The marked deterioration in 1q14 real GDP growth to 0.1% annual rate in the first release from 2.6% in the prior quarter elevates the importance of the 2q14 data (including the second half assumption for growth to accelerate some).  Our updated, though still fairly rough, estimates imply that the 1q14 drag on headline growth as a result of inclement weather should not exceed 1.5%-points.  But the imprint from weather was not the only depressing effect on growth.  The 1q14 inventory correction in response to the buildup through 3q13, which detracted 0.6%-point from growth, was heftier than our expectations of -0.2%-point, also contributed partly to the GDP shortfall.

-        The weakness in government spending and business fixed investment, which unexpectedly contracted in 1q14, also magnified the downside surprise.  Separately, the negative contribution from net exports of 0.8%-point, though sizable, was just a touch larger than our updated assumption of 0.7%-point subtraction.  Notwithstanding the funky first print on real GDP growth, which undershot our forecast of 1.4% and the consensus estimate of 1.2%, real consumer spending grew by more than expected at 3.0% relative to our projection of 2.0%.  The upside surprise in consumer outlays was largely within services, specifically in utilities (weather-induced) and health care (due to “Obamacare”) spending.  Our rough calculations at this time imply that 2q14 consumer spending growth could potentially hover in the vicinity of 3%.
-        Nevertheless, in light of incomplete source data for 1q14 GDP calculations, it is also crucial to avoid putting too much emphasis on the advance release.  On average, the absolute revision over the last two years--from the first estimate to the final print--is around 0.7%-point (0.9%-point over the past four quarters and 0.5%-point over the last three years).  But incoming source data since the advance 1q14 release, according to our calculations, suggests that headline real GDP growth is tracking slightly weaker at around -0.2% annual rate from the initial print of 0.1%.
-        Our latest assessment of the US economy in early 2q14--based on the timely guidance from our proprietary High-Frequency Activity Tracker (or HAT)--implies that real domestic demand (GDP excluding inventories and net exports) growth might be bouncing back to modestly above 3% from the 1% to 1.5% percent range in 1q14.  Therefore, there is some upside risk to our current 2q14 real GDP growth forecast of 2.7%.  Similarly, the tone from the Apr 30 FOMC statement, which describes that economic growth has “picked up recently, after having slowed sharply during the winter…”, suggests that policymakers generally recognize the incipient improvement in the overall economy from the partial paralysis in 1q14.

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