Was the GDP report really so terrible?

U.S. equities drifted lower on Friday as buyer exhaustion set in after an exciting week.

Cooling investors' ardor were mixed tech earnings, lingering disappointment with President Donald Trump's tax proposal from Wednesday, a lack of progress on health insurance reform and worries about a potential government shutdown. But above all, investors were unhappy with a very weak initial reading of first-quarter U.S. GDP. Growth came in at just 0.7 percent as consumer spending posted its weakest result since the end of 2009.

But the stock market's losses were really quite modest, with Nasdaq even pushing to a new intraday high at the open. Wall Street, it seems, tried to focus on the silver linings in the report ahead of another busy week of economic reports and a Federal Reserve moneary policy decision on Wednesday.

The GDP report sure wasn't pretty: Growth slowed from the 2.1 percent pace set in 2016's fourth quarter to its worst pace in three years (chart below). Personal consumption increased just 0.3 percent following a 3.5 percent expansion in the previous quarter, which is exceedingly odd given off-the-charts survey-based measures of consumer confidence in recent months. Inventories were a drag.

Bright spots included nonresidential fixed investments (businesses are ramping up spending, especially in the mining sector) and residential investment, which increased at a 13.7 percent seasonally adjusted annualized rate for its second straight quarter of very strong gains. The export gap also narrowed, slightly.

cbsgdp.png

Paul Ashworth, chief U.S. economist at Capital Economics, doesn't believe the weak first-quarter performance will keep the Fed from hiking rates again in June. Aside from the silver linings outlined above, he noted a tendency for weakness in first quarters that seasonal adjustments haven't fully accommodated. Since 2011, the average growth rate for the quarter is just 0.9 percent vs. 2.4 percent in each of the other three.

Another likely drag was unseasonably warm weather, which reduced consumer spending for utilities.

Overall, IHS Markit expects full-year 2017 GDP growth to come in around 2.5 percent, led by the double-digit gain in residential investment, the best growth in five quarters.

We'll know more when the Fed holds its policy meeting on Wednesday, May 3, and when the latest jobs numbers are released next Friday. Also coming are updates on personal income and consumption, motor vehicle sales (a recent worry) and fresh data on labor costs and productivity. 

  • Anthony Mirhaydari

    Anthony Mirhaydari is founder of the Edge , an investment advisory newsletter, and Edge Pro, options newsletter. Previously, he was a markets columnist for MSN Money; a senior research analyst with Markman Capital Insight, a money management firm; and an analyst with Moss Adams focusing on the financial services industry.