U.S. Economy Expands 2.5 Percent in First Quarter, Less Than Expected, Boosted by Consumer Spending

The U.S. Economy expanded less than expected in the first quarter, according to the Bureau of Economic Analysis. Economists surveyed by Bloomberg were expecting a reading of 3.0 percent with estimates clustered around the number and the range of estimates of the survey encompassing 2.3-3.3 percent.

The BEA noted: "The increase in real GDP in the first quarter primarily reflected positive contributions from personal consumption expenditures (PCE), private inventory investment, exports, residential investment, and nonresidential fixed investment that were partly offset by negative contributions from federal government spending and state and local government spending. Imports, which are a subtraction in the calculation of GDP, increased."

Government Spending

As the BEA stated, federal spending was a drag on GDP in the first quarter due to the Fiscal Cliff and the Sequester. Government spending decreased 8.4 percent decreased 8.4 percent in the first quarter, compared with a decrease of 14.8 percent in the fourth. National defense spending decreased 11.5 percent, compared with a decrease of 22.1 percent in the fourth quarter while non-defense spending decreased 2.0 percent in contrast to an increase of 1.7 percent in the fourth quarter.

Consumption

Positively, private consumption grew strongly in the quarter, showing that excluding fiscal tightening, the underlying economy expanded modestly. The personal consumption component of GDP expanded 3.2 percent vs. 1.8 percent in the fourth quarter with durable goods purchases slowing to 81. percent growth from 13.6 percent growth in the fourth quarter. The services economy also saw an uptick in the fourth quarter, growing a strong 3.1 percent vs. the fourth quarter's 0.6 percent rate of growth.

Exports

Real exports of goods and services increased 2.9 percent in the first quarter, in contrast to a decrease of 2.8 percent in the fourth. Real imports of goods and services increased 5.4 percent, in contrast to a decrease of 4.2 percent in the fourth quarter.

Inventories

Negatively, inventories grew substantially in the first quarter. Inventory growth is a negative for future growth because it generally implies that in the next quarter, production will slow as inventories are drawn down. This phenomenon is known as the inventory cycle and is one reason for the quarter-to-quarter cyclicality of the economy.

In the first quarter, inventories added 1.03 percentage points to real GDP after subtracting 1.52 percentage points in the fourth quarter. Private businesses increased inventories $50.3 billion in the first quarter, much more than the $13.3 billion increase in the first quarter. Real final sales, GDP less inventory growth, grew 1.5 percent in the first quarter as compared to 1.9 percent growth in the fourth quarter.

Income, Outlays, and Savings

Personal incomes grew 3.2 percent in the first quarter, slower than the growth rate seen in the fourth quarter of 8.1 percent. The decline reflected a downturn in dividends and increased contributions to government social programs as part of tax hikes such as the expiration of the payroll tax holiday. Real disposable income decreased 5.3 percent in the quarter vs. a gain of 6.2 percent in the fourth quarter.

Outlays increased 4.1 percent in the quarter, faster than the rate seen in the fourth quarter, supporting the personal consumption data that consumption was strong in the quarter. The personal savings rate plummeted in the first quarter to 2.6 percent from 4.7 percent in the fourth quarter. Overall, the GDP report had a bad headline number that missed estimates followed by some negative internals.

S&P 500 futures traded lower by 5 points after the release to 1,576.70, slightly below where they were before the release. U.S. 10-year bond yields ticked lower by 3 basis points to 1.67 percent while the 2-year bond yield fell 1 basis point to 0.22 percent. The Dollar Index fell sharply by 0.3 percent after trading near flat before the release on weakness against the yen, the Swiss franc, the pound, and the euro. Commodities were also lower as oil futures traded lower and gold ticked higher to $1,468.80 on the front-month future.