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The preliminary estimate for US Q1 GDP looks strong, but not all that glitters is gold

Signs of deceleration in domestic demand confirm our outlook for a progressive slowdown in the second half of the year, as we expect the impact from the fiscal stimulus to fade.

  • The US Q1 Real GDP growth came in well above our expectations, growing at 3.2% QoQ annualised rate after 2.2% QoQ in Q4 2019. This is the third quarter the US economy grows at a rate above 3% in the last 5 quarters (after 4.2% and 3.4%, respectively in Q2 and Q3 last year). The year over year rate also picked up to 3.2% YoY, after closing at 3.0% Q4/Q4 in 2018. Yet, current-dollar GDP increased 3.8% (down from 4.1% in Q4) as GDP implicit price deflator decreased from 1.9% in Q4 to 0.6% in Q1.
  • Yet, looking at the composition of quarterly growth, the two expected key drivers posted a weak reading: personal consumption expenditures (especially in the key durables goods component) and investments (in the key equipment component) decelerated.
  • Domestic demand slowed sharply, with contraction of imports (-3.7% QoQ), deceleration of final sales to domestic purchasers ( down from 2.1% to 1.4% QoQ) and outsized increase in inventories (adding 0.7% to GDP).
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  • Decrease in Personal Consumption momentum on a quarterly basis, but annual trend holding up well amid signs of pick-up from retail sales in March. Consumer fundamentals remain still supportive to our outlook.

a) Quarterly personal consumption expenditure growth moves from 2.5% in 18 Q4  to 1.2% QoQ in 19 Q1. This takes the contribution to quarterly growth down from 1.7% to 0.8%. Durable goods contract by -5.3% QoQ, Non durable goods decelerate from 2.1% to 1.7% QoQ. Services consumption also decelerates to 2.0% (from 2.4%). The main drag was represented by the contraction in motor vehicles and parts consumption.

b) But if we look at the data in terms of trends (year over year), personal consumption expenditures hold up well around 2.7% YoY (from 2.6%), driven by services consumption growth;

c) While consumer spending was weak, it ended on a strong note with retail sales surging in March. US consumer fundamentals remain broadly supportive for our call of moderating, yet resilient personal consumption expenditures.

  • Non-residential investments broadly decelerate, contributing only by 0.4% (down from 0.7%) to quarterly GDP: Non-residential investment (+2.7% QoQ) saw a contraction in Structures investments (-0.8%, consequence of the downturn in the energy sector), a flat reading of Equipment (0.2%) and a deceleration in IPP (+8.6% QoQ). Deceleration in investments is also in line with our outlook, albeit the sharp deceleration in equipment investments calls for close monitoring.
  • Residential Investments continues to contract (-2.8% QoQ) and subtract 0.1% from quarterly GDP growth
  • Inventories changes (up USD 128bn, the most since Q2 2015) contributed with a huge 0.7% to quarterly GDP growth. This is an unusual surge especially in a moment where imports contract, hence may see a reversal in following months and perhaps a downward correction as more data on the quarter become available ( this is a preliminary estimate).
  • Trade alone added 1% to GDP growth as imports contracted by -3.7% QoQ (the largest quarterly decline since late 2012, contributing by 0.7% to quarterly GDP growth).
  • Government consumption increased solidly by 2.4% QoQ, adding 0.4% to growth, as the Bipartisan Budget Act still deploys some effects.
USARDI Annalisa , CFA, Senior Economist
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The preliminary estimate for US Q1 GDP looks strong, but not all that glitters is gold
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