Like Groundhog Day, weak GDP report a first-quarter tradition
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Over the last 20 years, real GDP growth has averaged 1.4 percent in the first quarter, and 2.6 percent in the subsequent three quarters of the year. In four of the last seven years, the Q1 real GDP growth reading has been the worst of the year. The pattern of first-quarter weakness has moved far beyond random noise or coincidence. 

Some years, a sub-par Q1 could be blamed on a rough winter. That was certainly the case, for example, in 2010 and in 2014.  Last year, GDP was typically puny in Q1, advancing at only a 0.8-percent pace despite a relatively benign winter for most of the country. The absence of a clear reason for the soft performance set off alarm bells in financial markets and at the Fed, where officials put off a rate hike until later in the year and ended up not moving again until December.

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Indeed, throughout the spring and summer of 2016 in response to the soft Q1 reading, the consensus of economic forecasters maintained that the economy could not possibly bounce back vigorously enough in the second half of the year to get back to the 2-percent pace that has characterized the entire expansion. 

  

In the end, this was a lot of misplaced angst, as, in line with the well-established pattern, GDP growth surged over the rest of the year and the four quarters of 2016 averaged exactly 2.0 percent.

Last year’s experience has been instructive. Economists now are more convinced than ever that Q1 GDP growth is not repeatedly weaker than expected for specific reasons but just fits a statistical pattern. Data geeks call it “residual seasonality,” a technical term that means that even after the Bureau of Economic Analysis runs its seasonal adjustment program on the GDP data, Q1 is still habitually out of line to the downside.

With the memories of 2016 fresh in economists’ minds, the reaction was different early this year as the flow of monthly data began to point to yet another soft Q1 performance. GDP forecasts drifted downward over the last two months, and immediately in advance of the release of the preliminary Q1 GDP estimate, economists were looking for an anemic 1.0-percent annualized rise. 

As it turns out, forecasters were broadly correct. In fact, real GDP increased even more slowly than expected, advancing by only 0.7 percent. Yet, unlike a year ago, there is no panic in the air.

Indeed, the detailed breakdown of output released Friday backs up a calm reaction. Consumer spending was extremely weak in Q1, barely rising at all after averaging 3-percent growth in real terms over the past three years. However, the most important source of softness came, counterintuitively, from an unusually mild winter, which resulted in smaller-than-usual heating bills (ultimately, this ought to be a good thing for the economy, since it provides households with more disposable income left over to spend on fun stuff). 

Auto sales also pulled back after a surge late last year but should stabilize going forward. The other main source of weakness in the Q1 GDP tally came from a steep drop in the pace of inventory accumulation. This bodes well for a rebound in growth in the spring, as bare shelves and empty warehouses have to be refilled going forward, setting the stage for a step-up in the pace of output.

With labor markets strong, underpinning household demand, and business spending finally showing signs of life, the stage is set for a powerful rebound in real GDP growth in Q2, making up for the shortfall relative to trend seen in Q1.

Thankfully, having learned their lessons the hard way, the economist community, financial market participants and the Fed have finally made their peace with the quirky pattern of GDP, as the tepid output gain has barely impacted expectations for the economy and the Fed. 

Much like Bill Murray’s Phil Connors character in the movie "Groundhog Day," we have all come to terms with the repetitive soft Q1 GDP readings and are simply making the best of it.  Hey, come to think of it, Groundhog Day is February 2, which is in the first quarter. Go figure!

 

Stephen Stanley is the chief economist for Amherst Pierpont, a broker-dealer providing institutional and middle-market clients with access to fixed-income products. He is a frequent contributor on CNBC and Bloomberg TV programming.


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