The Sell-Side Take On The Tepid GDP Growth

Tyler Durden's picture

Relative to their positively exuberant +2.7% GDP growth expectation, Goldman opines on the below consensus print for today's Real GDP growth. The composition of growth was seen as weak, with a larger add from inventories and less momentum in domestic final sales than they had expected. There is a silver-lining though as they suggest the weakness in national defense spending that explained part of the miss will possibly reverse next quarter (or not we hesitate to add). BofA adds that the strength in consumer spending and contribution from motor vehicle output look unlikely to repeat in future quarters. Auto production added more than a percentage point to growth. At least half of that is due to the recovery from Japan supply chains and is not sustainable. Outside of autos, GDP growth would have been just 1.1% - thank goodness for all that channel-stuffing.

 

Key Numbers:

Real GDP +2.2% (qoq, annualized) for Q1 (advance) vs GS +2.7%, median forecast +2.5%.

Real price index +1.5% (qoq, annualized) for Q1 vs GS +1.8%, median forecast +2.1%.

Core PCE price index +2.1% (qoq, annualized) for Q1 vs GS +2.1%, median forecast +2.1%.

Goldman Sachs

MAIN POINTS:

  • Real GDP increased by 2.2% (annualized) in Q1, less than the consensus had expected. In addition to a weaker headline result, the composition of the report was poor. In particular, growth in domestic final sales (GDP less inventories and net trade) increased by just 1.6%, below our estimate for an increase of about 2.5%. Inventories contributed more to growth than we had anticipated: +0.6 percentage points (pp) instead of +0.2pp (the contribution to growth from net trade was roughly in line with our estimates).
  • Within domestic final sales, consumer spending was the one positive surprise. Real personal consumption expenditures (PCE) increased by 2.9%, above the consensus forecast. Assuming no revisions, the result implies growth in March PCE of 0.5-0.6% (month-over-month) (more likely, we would expect a combination of healthy growth in March as well as some upward revisions). The other major components of domestic final sales were weaker than expected. Business fixed investment declined by 2.1% (qoq, annualized), subtracting 0.2pp from Q1 growth. The weakness reflected a 12% decline in structures investment and a smaller increase in equipment and software investment than we had forecast. Government spending also declined by 3.0%, reflecting another large decline in national defense spending (we think the weakness in this component will reverse next quarter). Residential investment increased by 19.1%, in line with our estimates.
  • The GDP price index increased by 1.5% (qoq, annualized) in Q1, below the consensus forecast. Together with the downside surprise on real GDP, nominal GDP growth came in at 3.8%, nearly a full point below the value implied by consensus expectations for real GDP growth and the GDP price index. Growth in the core PCE price index was in line with expectations at +2.1%.
  • Separately, the employment cost index (ECI) increased by 0.4% (not annualized) in Q1, slightly less than expected. Growth in wages and salaries accelerated to +0.5% from +0.3%, but benefit compensation growth decelerated to +0.5% from +0.7%.

Bank Of America

Auto production responsible for 1ppt of GDP

The initial estimate on Q1 GDP was a disappointment. Real GDP advanced at 2.2% annual rate against a consensus expectation of 2.5%. We assumed that growth would be driven primarily by final demand; but, inventories contributed 0.6ppts to GDP, putting real final sales at a weak 1.6% annualized growth rate. Moreover, the strength in consumer spending and contribution from motor vehicle output look unlikely to repeat in future quarters. Auto production added more than a percentage point to growth. At least half of that is due to the recovery from Japan supply chains and is not sustainable. In fact, outside of autos, GDP growth would have been just 1.1%. The soft nature of today’s GDP report reinforces our below consensus growth outlook.

Consumption increase looks unsustainable

Consumer spending advanced 2.9% annualized, the strongest quarter since Q4 2010. The gain occurred despite a 9.5% drop in energy goods and services. The improvement in consumption was driven by vehicle sales; durable goods spending rose 15.3%. Nondurable goods rose 2.1%, lifted by a 6.7% increase across clothing and shoes. However, it is clear that the rise in consumption was driven by a decline in savings; the personal saving rate dropped to 3.9% from 4.5%, the lowest since 2007. Meanwhile, real disposable income rose just 0.4% despite the improvement in employment. Lower savings plus weak income is not a favorable combination for the consumption outlook.

Capital not deepening

Fixed investment was weak. Business investment was soft with spending on equipment and software up just 1.7% at an annual rate. Part of the weakness can be explaining by the expiration of the tax subsidy to accelerate equipment depreciation; so, Q4 was strong at the expense of Q1. The two-quarter average from Q4 2011 to Q1 2012 ran just 4.6%, indicating a softening trend. Structures investment (commercial real estate) fell 12.0%, the sharpest one-quarter drop in a year. Residential investment rose 19% as renovations and multi-family construction perked up. That said, because housing is such a small share of GDP now, this 19% surge managed to contribute just 0.4ppts to growth.

Government continues to tighten its belt

The government sector shaved 60bps off GDP with the federal government contracting 5.6%, primarily due to national defense spending, an admittedly volatile number. The belt tightening across state and local governments continues; S&L dropped 1.2% and has been a drag on growth for seven consecutive quarters.