What’s behind the Better-than-Expected 1Q18 GDP Estimate?

All four components had positive contributions

The Bureau of Economic Analysis (or BEA) released its first estimate for the first quarter real GDP on Friday. The report indicated that all the four major GDP components had a positive contribution to the 1Q GDP growth. Of the four major contributors, the personal consumption expenditure (or PCE) has the highest impact on GDP growth. In the first quarter, the contribution of PCE was at 0.73 as compared to 2.32 real GDP in 4Q17. However, PCE tends to be lower in the first quarter, and then it usually bounces back in the next three quarters.

What’s behind the Better-than-Expected 1Q18 GDP Estimate?

Highlights of Q1 GDP report

Individual contributions to GDP growth have been positive from the four components as the above graph shows. However, the components that stand out are imports of goods and the change in private inventories. Imports could have fallen compared to 4Q17 due to new tariffs, and exports have also declined but by a smaller percentage. The contributions from fixed income and equipment investments have fallen in Q1 as compared to Q4, but they still had positive contributions. President Trump’s tax cuts for industries (XLI) and individuals became law in December, which led to an increase in investments from these industries (VIS), and these investments could continue to have a positive impact on the economy. The other reform was the change in account practices that would allow complete expensing of fixed investment rather than the gradual depreciation of the asset, which could also lead to increased spending from industries (FXR).

What could drive GDP growth higher going forward?

Economic data from recent months indicated that consumer confidence, employment, and wages have been increasing. This combination of growth in consumer spending (VCR) and the increasing corporate investments indicate the continued growth of the US economy. Plus, inflation (TIP) is continuing to move towards the Fed’s target. These factors are likely to push the US FOMC to increase rates three more times this year. With many of the recent risks receding and key economic indicators improving, the outlook for the US economy remains strong and could continue to increase further.