U.S. GDP decline takes everyone by surprise
Although most analysts had expected today’s revision to first quarter U.S. GDP to be worse than the previous estimate of a 1.0 percent decline (annualized quarterly based), which was largely attributed to the harsh winter, none were anticipating the 2.9 percent implosion announced by the U.S. Department of Commerce. Indeed, the jaw-dropping result represented a six-standard-deviation miss from analysts’ forecasts. Culprits in the drag on the economy were net exports, which cut GDP growth by 1.5 percentage points (0.9 percentage points previously), and inventory change of -1.6 percentage points. In addition, total consumer spending expanded at a weak 1.0 percent annual rate, substantially lower than the earlier estimate of 3.1 percent.
While U.S. equity markets opened about 0.25 percent higher following the announcement, reflecting anticipation of continued accommodative monetary policy and positive indications from high frequency data, today’s result should not be dismissed so lightly. From a historical perspective, the contraction in GDP is unprecedented. Prior to today, U.S. GDP had never fallen more than 1.5 percent (except during or just prior to a NBER-defined recession) since quarterly GDP record keeping began shortly after World War II. The continued anemic performance of the U.S. economy increasingly calls into question the efficacy of monetary policy, particularly in the face of rising inflation and the steady march of investors into riskier assets. In my view, with equity and high-yield bond prices at, or near, record highs, justifying these purchases with the well-worn mantra “don’t fight the Fed” seems to be ringing somewhat hollow.