Recession? What recession? The U.S. economy grew by more than most had been expecting at the start of the year, pushing downturn fears further into the long grass.
In the latest signal that the economy is in better shape than most thought just a few months ago, official figures showed that the U.S. economy expanded by 3.2 percent in the first quarter of the year. This dwarfed the majority of economists’ expectations for growth of around 2 percent.
What’s more, output would’ve been even higher if it wasn’t for the partial government shutdown that took place at the start of the year, with the Bureau of Economic Analysis noting that it knocked 0.3 percentage points off growth.
“This is a big, positive surprise — we had penciled in 1.7 percent annualized in our March Global Economic Outlook forecast,” Brian Coulton, chief economist at Fitch Ratings, said.
The quarterly rise was mainly driven by a net trade gain as exports rose and imports slumped as many companies rushed goods into the U.S. last year in anticipation of higher tariffs, which have yet to materialize. Higher inventories and government spending also played a part.
This helped to make up for a slowdown in consumer spending to 1.2 percent, from 2.5 percent in the final three months of last year, while business investment also slowed.
Coulton noted that while the first-quarter boost from net trade and government spending is unlikely to be repeated in the second quarter, the main message is that private consumption and investment are slowing down “only gradually.”
He calculated that even if quarterly GDP growth reverts to 2 percent annualized through the rest of the year, annual growth will still be close to around 2.5 percent, which he believes will dampen recession worries “quite materially.”
Stephen Stanley, an economist at Amherst Pierpont Securities, was even more upbeat about the path for consumer spending. While the official retail sales data has been a mixed bag over the past few months, he thinks the hefty 1.6 percent gain in March “sets the stage for a vigorous rebound in household outlays in the spring.”
“At the moment, I have a 3.8 percent annualized increase (in consumer spending) penciled in for Q2,” he said.
Others, though, cautioned that it may be too soon to get out the party hats as the underlying picture might not be as strong as it looks at first glance.
Paul Ashworth, chief North American economist at Capital Economics, stressed that when the “oversize boosts” from net trade, inventories and highways investment, are taken out of the equation — all of which he believes will be reversed in the coming quarters — growth was only around 1 percent.
“Under those circumstances, we continue to expect that GDP growth will slow this year, forcing the Fed to cut interest rates before yearend,” he added.
President Trump will no doubt be hoping that the economy can remain strong in the run-up to the 2020 election.