Monday, April 30, 2018

Good Initial Q1 GDP Growth

Popular Economics Weekly

Real gross domestic product (GDP) increased at an annual rate of 2.3 percent in the first quarter of 2018, according to the "advance" estimate released by the Bureau of Economic Analysis. In the fourth quarter, real GDP increased 2.9 percent.

It dropped from the Q4 2.9 percent growth rate because of a decline in consumption. Consumers were probably tapped out from the holiday shopping splurge, and consumer spending now makes up 70 percent of GDP activity.
“The increase in real GDP in the first quarter reflected positive contributions from nonresidential fixed investment, personal consumption expenditures (PCE), exports, private inventory investment, federal government spending, and state and local government spending. Imports, which are a subtraction in the calculation of GDP, increased,” said the report.
Businesses picked up the slack, however, said commentators. Investment in structures such as office buildings and drilling rigs doubled to 12.3 percent while spending on equipment was up 6.1 percent. It looks like the biggest corporate tax cuts in 30 years may have helped give a lift to investment in the first quarter.

More drilling rigs won’t help our aging infrastructure, however, now some $2.5T in arrears on the deferred maintenance and replacement of our roads, bridges, electrical grid, water systems, and so forth. And the longer we wait to repair and upgrade our infrastructure, the further we fall behind China and other surging economies in growth.

Congress gave corporations the tax cuts, but that won’t help our productivity or future growth if they don’t now begin to spend on the public works that keep us competitive with the likes of China that is spending on everything including developing alternative energies to wean them from the polluting fossil fuels that the current US administration will not.

It is economic suicide, really, for Republicans to be cutting taxes to line their supporters’ pockets (some $1.5T over 10 years) and cut spending on Medicare and Medicaid to pay for it in the latest tax bill, when the $1.5T should have been used to keep the US competitive with the rest of the world.

The value of inventories, which adds to GDP, also increased to $33.1 billion from $15.6 billion. Investment in new housing was flat. In a surprise, the U.S. trade picture brightened. That also contributed to the higher-than-expected GDP. Exports rose 4.8 percent to outpace a 2.6 percent increase in imports. Government spending was also a bit stronger than expected, up 1.2 percent, said the BEA.

But hints of higher inflation in wages and salaries may cause the Fed to act sooner in this week’s FOMC meeting, rather than in June. The government reported the employment cost index rose 0.8 percent in Q1 which is the high end of expectations. The year-on-year rate is up 1 tenth to 2.7 percent for the highest reading of the last 10 years.
“And wages & salaries, not benefits, are the leading source of pressure, up 0.9 percent in the quarter for an annual 2.7 percent increase. But benefits are also up, climbing 0.7 percent for 2.6 percent year-on-year,” reports Econoday.
I maintain the Fed should not be raising rates further, until employee incomes have a sustained chance to break the inflation barrier of 2.5 percent—maybe for the rest of this year? The fact that it’s taken 10 years for wages and salary rises to return to levels prior to the Great Recession (per above graph) should tell us why it has taken us so long to recover. It’s the workers who have suffered most from the Greatest Recession since the Great Depression, not the banks and corporations.

Harlan Green © 2018

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