Friday, May 30, 2014

Weaker US Q1 GDP sets up strong Q2

March quarter US GDP was revised sharply lower on the back of a significantly lower inventory investment.  The initial print of +0.1% (annualised) was revised down to -1.0%.  However, all the signs are pointing to a strong bounce back in growth in the second quarter of the year.

The downward revision to inventories accounted for the entire GDP revision.  In total, inventories knocked 1.6 percentage points off GDP in the quarter.  The good news is that much of the inventory adjustment we expected to play out this year, and with that the drag on growth, has now already occurred.

As I pointed out following the release of the advance estimate the growth story in the quarter was not as bleak as the headline suggests.  Domestic demand came in at an annualised 1.6% in the quarter slightly higher than the initial estimate of 1.5%.  Consumer spending posted a solid 3.1% gain.

Nothing in the revision changes our view that the weak quarterly result was due to lower inventory accumulation and the poor weather at the start of the year.  Indeed partial activity data was already improving in the March month and on into April.  That makes me happier with my 4.0% (annualised) forecast for June quarter growth.  Annual average growth for calendar 2014 is expected to come in at 2.3%.