U.S. Growth: Behind the GDP surprise

U.S. Growth: Behind the GDP surprise

Strong headline growth for the U.S., with the devil in the details; Policy signals from China as trade talks resume.

"No one can bear it if policy swings back and forth between tightening and loosening many times a year"
People's Bank of China Deputy Governor Liu Guoqiang

U.S. Growth: behind the GDP surprise  

U.S. GDP grew at a 3.2% annual pace in Q1, well above the expected 2.3%.

But what’s behind the figure, the first of three estimates by the Department of Commerce, was revealing. More than half of the 3.2% figure – 1.7 percentage points – was the result of changes in the famously volatile categories of inventories and trade, the biggest boost from these combined sources in six years. Growth in inventories adds to GDP because filling warehouses requires production. Net exports boosted the trade component, contributing 1.03 percentage points. However, that was large the result of declining imports, as companies completed their stockpiling ahead of a potential increase in U.S. tariffs on imports from China – something which has yet to take place.

Inventories and trade were little help for underlying demand, which was substantially lower than overall GDP growth. That statistic, defined as final sales to private domestic purchasers, excluding trade, inventories and government, came in at 1.3%, the worst reading since 2013. One way to interpret the boost to overall GDP from inventories and net imports: this quarter's growth was earned in part at the expense of growth from future quarters, when final sales could come from already-built inventories rather than fresh production.

Personal consumption for Q1 was only slightly better than forecast, coming in at a 1.2% headline rate, and 1.3% excluding fuel and food.

Initial market reaction in fixed income was strongly positive. The yield for the 10-year Treasury moved downward from 2.525% to 2.493%; the 2-year from 2.320% down to 2.276%. U.S equities were less focused on the economic news than on the rapidly-unfolding earnings season, currently in progress.

China: Belt and Road – and trade.

The Belt and Road forum in Beijing last week was the scene of two important policy speeches.  The first, from People's Bank of China Governor Yi Gang focused on "building an open, market-oriented financing and investment system" for the multi-country program, deploying capital from the private sector as "the main force, while government funding will only play a guiding role, a leveraging role".

The second speech was delivered by Chinese President Xi Jinping, and included statements relevant to China's overall trade policy and current negotiations between China and the U.S.  Specifically, China "…will establish a binding enforcement system for international agreements" and “…eliminate improper rules, subsidies and practices that impede fair competition and distort the market."

This second speech coincided with the announcement of a new round of meetings of the top-level trade negotiation teams for China and the U.S.  U.S. Trade Representative Robert Lighthizer and Treasury Secretary Steve Mnuchin are headed to Beijing for talks scheduled to begin on April 30th; the talks were described by the White House as "cover[ing] trade issues including intellectual property, forced technology transfer, non-tariff barriers, agriculture, services, purchases, and enforcement”.


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