U.S. GDP Disappoints: PCE Barely Increases

Economic growth slowed to 0.7% during Q1'17 following a 2.1% advance during Q4'16. It was the slowest rate of increase in three years and fell short of expectations for a 1.3% advance in the Action Economics Forecast Survey. Weakness in consumer spending, inventories and foreign trade accounted for growth's deceleration. Pricing power picked up.

The slowdown in real economic growth reflected a 0.3% rise in personal consumption expenditures, its weakest advance since Q4'09. Growth was held back by a 2.5% decline (+7.4% y/y) in durable goods spending which followed three straight quarters of 9%-to-12% growth. Motor vehicle outlays declined 16.1% (+6.3% y/y) and reversed the Q4 jump. Offsetting this decline was a 14.7% surge (13.3% y/y) in recreational goods & vehicle consumption and a 2.6% gain (5.5% y/y) in home furnishings & appliances buying. Nondurable goods outlays increased 1.5% (2.5% y/y), a gain held back by a 7.9% decline in spending (-3.1% y/y) on energy products. Clothing outlays also fell 5.1% (-0.4% y/y), but food purchases rose 4.2% (5.2% y/y). Growth in services purchases of 0.4% (2.1% y/y) was restrained by a 2.3% decline (+0.8% y/y) in housing & utilities outlays. Health care outlays rose 3.2% (4.1% y/y) while recreation spending increased 4.0% (2.1% y/y).

Investment spending offset some of this weakness in personal consumption. Business fixed investment strengthened 9.4% (3.1% y/y) after a 0.9% rise. Structures investment surged 22.1% (7.1% y/y) after declining during all of 2005 and 2006. Producers durable equipment outlays increased 9.1% (0.8% y/y), only the second increase since Q3'15. Industrial equipment outlays jumped 13.0% (6.0% y/y). Information processing equipment investment rose 14.1% (5.4% y/y) and intellectual property product investment gained 2.0% (3.8% y/y). Residential investment surged 13.7% (2.4% y/y).

A reduced rate of inventory investment sapped 0.9 percentage points from overall economic growth and reversed the Q4'16 addition. A 0.1 percentage point contribution to growth from the foreign trade sector reflected a 5.8% rise in exports (3.1% y/y) and 4.1% growth in imports (3.8% y/y).

Government sector outlays declined 1.7% to the lowest level since Q3'15. Federal government investment declined 1.9% (-0.3% y/y) led by a 4.0% drop (-2.2% y/y) in defense spending. Nondefense purchases improved 0.9% (2.5% y/y). State & local government spending fell 0.4% (-0.8% y/y).

The chain type GDP price index increased 2.3%, its fastest rate of growth in three quarters. A 2.0% rise was expected. The PCE price index advanced 2.4%, the quickest rate of increase since Q2'11. The business fixed investment price index rose 1.4% (0.9% y/y), the swiftest rise since Q2'14. Growth in the residential investment price index slowed to 2.4% (4.6% y/y), the slowest growth in a year.

The GDP figures can be found in Haver's USECON and USNA database. USNA contains virtually all of the Bureau of Economic Analysis' detail in the national accounts, including the integrated economic accounts and the recently added GDP data for U.S. Territories. The Action Economics consensus estimates can be found in AS1REPNA.