Fra BNP Paribas:
- US growth slowed in the first quarter of 2017, to 0.7% q/q saar, after an above-trend 2.1% q/q saar pace in Q4. The reading was a disappointment to our expectation (1.5%) and the consensus expectation (1.0%), but much of the weakness in the GDP report can be attributed to temporary factors that should fade in Q2. Moreover, with the largest gain since 2007 in the employment cost index (the FOMC’s preferred measure of compensation) and core PCE at the Fed’s target (2.0%), we think the FOMC will stay on track for removing more monetary accommodation this year. We continue to see a 25bp rate hike in June followed by an adjustment of the Fed’s reinvestment policy in September and an additional 25bp hike in December.
- The temporary factors that are expected to fade in Q2 include a subtraction from motor vehicle purchases (-0.5pp), housing and utility services (-0.3pp), and slower business inventory accumulation (-1.0pp). On the autos side, while the weakness in the number of vehicles sold may persist, we do not expect a further leg down in sales. The utility story is the “blame it on the weather” effect that will likely reverse in Q2, in line with the shift in temperatures. Lastly, on the inventory side, the subtraction from non-farm inventories is typically followed by a bounce, and we see this component as unlikely to remain a drag on growth in Q2.
- In total, the contribution of household spending (~70% of GDP) to overall growth was a meagre 0.2ppm with a 0.3% q/q saar gain in the quarter. However, business investment (~12% of GDP) grew by 9.4% in the quarter with an impressive 22.1% q/q saar gain in structures investment and a 9.1% q/q saar pickup in equipment investment. In addition, residential investment (~3.8% of GDP) jumped by 13.7% in the quarter.
- Net exports added just 0.1pp from total growth in Q1 after subtracting a whopping 1.8pp in Q4 after the Q3 surge in exports of soybeans faded.
- The other bright spot in the month’s report was from the Employment Cost Index, which accelerated by 0.8% q/q or 2.4% y/y in the quarter – its best showing since 2007. The improvement in the Fed’s preferred measure of employment compensation was seen on both the wages and salaries front as well as from benefits, and stands out in contrast to the gains in the employment report’s measure of average hourly earnings. Moreover, the index was running at a 2.3% y/y pace in the first three quarters of 2016, so the Q1 2017 print lends some support to the idea that the Q4 disappointment (0.5% q/q or 2.2% y/y) was temporary.
- “Temporary” is the key theme we expect to come out in next week’s FOMC statement with a discounting of the Q1 GDP softness for the reasons mentioned above, while the inflation report offered similar one-off explanations that will give the FOMC enough breathing room to keep the Committee (and statement) headed toward a June rate hike – particularly when the unemployment rate is at 4.5%, well below what the FOMC pegs as the long-term rate.
