Financial Insights

Fake News Alert: Q1 GDP Indicates a Weak Economy

The headlines appear to indicate economic weakness by calling out, “US First-Quarter Growth Weakest in Three Years, as Consumer Spending Falters” and “GDP Grows Less than 1% in First Quarter.” The press continues to love to highlight weak economic growth since it drives eyeballs and ad sales. But this fictitious storyline is not born out by the data. US Growth remains robust regardless of the “fake news” headlines.

In fact, a lower than expected Q1 GDP has been a pattern now for years and is likely caused by seasonality adjustment issues.  Since the end of the recession in 2009, Q1 GDP has averaged 1% growth, while all remaining quarters have averaged over 2%. This anomaly isn’t just a theory based on this seemingly random evidence, but one that is acknowledged by the Bureau of Economic Analysis, the government agency that constructs gross domestic product data. In 2016, BEA statisticians  acknowledged that their efforts to adjust for seasonality had problems, particularly for Q1. In July 2016, Brent Moulton, associate director for the National Economic Accounts at the BEA said, “We did find some evidence of residual seasonality both over the most recent 10-year period and over a 30-year period.” They have since struggled to correct those errors.

Other components within the Q1 GDP also superficially appeared to indicate weakness. Real personal consumption was the weakest since 2009, with growth of only 0.3%. But Q4 consumption was quite strong at 3.5%. Had Q1 consumption climbed at an average level, GDP would have grown around 2%. The weakness was partially from reduced spending on motor vehicles and also from utilities, which reflected unusually warm winter temperatures, something which allows consumers to spend that income on other things in the future.

Most importantly the Employment Cost Index (ECI), which tracks wages and benefits, increased 0.8% over the prior quarter. This is the strongest quarterly growth since December 2007 and significantly faster than the 0.5% growth experienced in the prior quarter. Spending follows wages, not the other way around, so this supports savings or spending growth, or both,  in the months ahead.  This rise in income will support future GDP growth. Mathematically if wages are higher, improvement in spending or savings must follow. That income must go somewhere.

Other measures that were not highlighted in the media were stronger. Disposable personal income climbed by over 3%, a rate that is well above  inflation. Personal savings also ticked higher to nearly 6%. Other measures in the report, such as residential fixed investment, which are good indicators of future growth, were also up strongly. Healthcare spending continues to climb and is likely to continue to support earnings growth. With market valuations at much lower levels in healthcare, the sector should do well. Capital investment also improved noticeably, as oil drilling rigs were put back to work in response to modestly higher oil prices.  Additional gains should be seen as OPEC continues to restrain its supply, which leaves room for domestic producers to increase oil and gas production.

The data flow provides further evidence of a solidly improving economy on most metrics across most industries. While the media likes to misinterpret this data in the name of news, it’s just not accurate.  Despite the negative spin provided by the media, the market got it right. Yields barely moved following the GDP report. Steady economic improvement is continuing.

The foregoing content reflects the opinions of Advisors Capital Management, LLC and is subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. Past performance may not be indicative of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses which would reduce returns. Securities investing involves risk, including the potential for loss of principal. There is no assurance that any investment plan or strategy will be successful.


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