The economic growth report for the first quarter was very nice. Maybe too nice. Morgan Stanley thinks it’s a blip that has little to do with real growth—and is unlikely to be repeated in the near future.
Gross domestic product (GDP) expansion for the January-March period was a heady 3.2%, according to the US Bureau of Economic Analysis. That beat expectations of 2.2%. Let’s see whether the lofty 3.2% number is revised down in the second, more complete version expected to be released May 30. Slowing economies overseas, for instance, could well have a bad impact on domestic growth.
To Morgan Stanley’s economists, a lot of the boost can be explained by an unexpected surge in inventories (adding a 0.44 percentage point increase to GDP), a surge in net exports (1.2 point), and larger government spending (0.4). They didn’t view this as sustainable and are expecting the growth pace to slow to 1.1% in the second quarter, ending June 30.
The inventory build-up, the report surmised, likely “points to a large reversal in Q2,” the result of a throttling back in production as the system works off the backed-up goods in the warehouse. Personal consumption and business investment slowed in the first quarter, which may well be a precursor to a second-period dip.
One surprise was a drop-off of imports, which allowed US exports to handily outdo them, thus counting as an overall plus for the US economy. While the Morgan Stanley report didn’t say so, one explanation for the import fall-off could be tariffs on foreign merchandise.
The rise in government expenditures was concentrated on state and local construction activity, possible related to the launching of infrastructure projects to improve crumbling of roads, bridges, and the like. Federal outlays dipped slightly.
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