- by New Deal democrat
The advance report for Q1 GDP was a study in contrasts, both in terms of the leading indicators and also the sources of strength.
Let me start with the general information: on a nominal basis, GDP in Q1 increased a mediocre 1.4% at an annual rate (blue). After adjusting for inflation, in real terms it only grew 0.5% annualized (red):
This is one of the poorer performances since the pandemic. On the other hand, since Q1 of last year was even worse, on a YoY% basis, growth in the GDP improved a little both nominally and in real terms:
But GDP growth was even more mediocre than the top-line measure makes it look, because in Q4 we had the lengthy government shutdown. That spending resumed in Q1, so government spending bounced back sharply:
Only in four quarters in the past five years did government spending grow more sharply than in Q1. Had the spending growth only been at “normal” post-pandemic levels, real GDP growth in Q1 would have been basically *0%*.
But wait, there’s more!
I’ve been writing for many months that the housing sector has been outright recessionary. That was further confirmed in this report. In nominal terms, private fixed residential investment (the GDP version of housing) declined -0.9%. In real terms it declined -2.1%. The best way to look this as a long leading indicator is as a share of nominal (blue) or real (red) GDP:
Either way, this was the lowest contribution to GDP since the recession. To beat this particular dead horse one more time, it was recessionary.
So, in addition to the rebound in government spending, what saved Q1 GDP? Corporate spending and profits.
As per usual, corporate profits (red) aren’t reported in the first advance GDP report, but a reasonable proxy, proprietors’ income (blue) is, and that income rose 1.8%:
Only three times in the past five years did it increase more on a quarterly basis:
This strongly suggests that corporate profits in Q1 rose sharply as well, something that has been apparent in the quarterly corporate profit reports to Wall Street:
And the GDP report showed that the type of spending associated with the construction and operation of AI data centers, information processing equipment and intellectual property products, both increased sharply, with the former at a near record increase:
Update: The surge in corporate spending was also apparent in the final March report for manufacturers’ spending on durable goods orders (blue), capital goods (red), and consumer goods orders (gold), which increased 0.8%, 3.4%, and 2.4% respectively, the core capital goods segment to an all-time record high:
To sum up, Q1 GDP likely would have been all but flat were it not for the rebound in government spending. Further, the two long leading indicators in the report, residential investment and corporate profits, pointed in starkly opposite directions. The former was recessionary and the latter showed a Boom.
The rebound in government spending will not be repeated in Q2. The direction the economy takes from here will depend on how long the corporate-led AI data center Boom can continue, vs. how battered consumers are by higher inflation.
