Real GDP Was Weak in Q116 -- No Significant Speedup Seen for Q216

The 0.5% (q/q, saar) Q116 Real GDP Growth was weak, and the details do not necessarily argue for a sharp speedup in Q216 GDP -- the NY Fed Model's 1.2% early projection for Q216 Real GDP does not seem unreasonable.

The Q116 GDP composition is only mildly pro-growth at best:  Final Sales were up and Inventory Investment down, a positive combination.  But, early evidence does not point to a significant speedup in Final Sales, while Inventory Investment was not terribly low in Q116.

1.  Real Final Sales slowed to a modest 0.9% after +1.6% in Q415  -- to the slowest pace since Q115. The slowdown was widespread.

       a.  The only significant strength was in Residential Construction, which might have been exaggerated by the warm winter.  The pattern of Housing Starts and New Home Sales since November do not suggest a similar gain in Q216, as I argued yesterday.

       b.  Business Equipment Spending fell in Q116, and is likely to remain soft in Q216 -- Core Durable Goods Orders -- a leading indicator of this spending -- weakened in February and March.  Business Investment in Structures also fell.  This probably reflected a further decline in oil drilling -- which is not likely to bounce back in Q216.

        c.  Consumer Spending slowed to 1.9% from 2.4% in Q415 -- to the lowest q/q pace since Q115.  It is possible that Consumer Spending will be revised up when survey data on Services become available, as has often been the case since ObamaCare went into effect.  But, this survey will not be available until the 2nd GDP revision. 

2.  Nonfarm Inventory Investment fell to $62.7 Bn from $76.0 Bn in Q415.   The Q116 level is below the $93.3 Bn average of the prior 4 quarters, but Nonfarm Inventory Investment may not bounce much in Q216 without a pickup in final demand.

The inflation data in the report were slightly higher than consensus.

1.  The most important was a 2.1% (q/q, saar) increase in the Core PCE Deflator.  It exceeded the 1.9% consensus and was in line with the Fed's target.  It remains to be seen whether this pace will continue in Q216, as there could have been start-of-year and other special factors that boosted it temporarily in Q116.