NEW YORK — The first estimate of first quarter annualized GDP growth of 2.5 percent represents a marked improvement from the 0.4 percent gain in the fourth quarter of 2013, though it compared to expectations of a stronger 3.0 percent increase, RBC Economics reported today.
The main downward surprise was another sizable drop in government spending of 4.1 percent. This did represent an easing from the 7.0 percent drop in the fourth quarter, though RBC had been expecting a decline of only 1 percent, said Paul Ferley, assistant chief economist. As a result, the government component subtracted 0.8 percent from overall annualized first quarter GDP growth rather than the 0.2 percent RBC had expected going into the release.
The weakness was largely in defense spending and likely reflected authorities anticipating/implementing the forced expenditure cuts (i.e., sequestration) that were enacted March 1. Outside of government, most other components came in as expected, Ferley noted.
“Encouragingly, consumer spending jumped 3.2 percent following a 1.8 percent gain in Q4,” he explained. “This improvement occurred despite payroll taxes rising Jan. 1. The strength was concentrated largely in the durables component where spending rose 8.1 percent. This rebound in consumer spending was one of the key contributors to the improvement in overall GDP growth in the first quarter. The other key factor was inventories, which added an expected percentage point to growth after subtracting 1.5 percent in Q4.”
Business investment growth slowed as expected to 2.1 percent from a 13.1 percent increase in the fourth quarter, while residential investment growth remained strong, rising 12.6 percent, though this was down from the 17.5 percent gain recorded at the end of last year. Exports returned to positive growth, rising 2.9 percent after a 2.8 percent decline in the fourth quarter. However, this was outstripped by imports rising an even stronger 5.4 percent, following a 4.2 percent drop in Q4. This resulted in net exports subtracting 0.5 percent from first quarter growth after adding 0.3 percent in the fourth quarter.
“The recovery in economic growth going into 2013 is encouraging after the minimal increase in the fourth quarter. However, there is reason to doubt whether growth will strengthen further in the current quarter,” said Ferley. “A full percentage point of growth in Q1 came from a rebuilding of inventories, which is not expected to continue in Q2.
“As well, a number of indicators have shown a slowing in activity at the end of the first quarter, with a weakening in March data for both employment and the manufacturing PMI,” he explained. “This weakening coincided with the implementation of across the board cuts to government expenditure, i.e., sequestration, March 1. Uncertainty about the impact of reduced government spending may have weighed on business sentiment and the willingness to take on new workers.
“The first quarter government spending component likely already has started to reflect the impact of these expenditure cuts in defense. Our forecast assumes that the attendant uncertainty of this fiscal restraint will contribute to Q2 growth slowing to 1.9 percent,” said Ferley. “Though our forecast also assumes that this pressure will prove temporary with growth rebounding over the second half of this year, the Fed is expected to keep policy highly accommodative to help assure that this occurs.”
SOURCE: RBC Economics press release