The strong 3.2% (q/q, saar) Q119 Real GDP Growth should not be dismissed as temporary. It will make the Fed more cautious about its "patient" policy, as the economy's strength will likely force officials to raise their GDP forecast for the year. Strong Employment Reports and a speedup in core inflation measures in the next few months could bring Fed tightening risks back into the markets.
1. While Private Final Demand was soft -- hurt by bad weather, government shutdown and trade war -- early evidence points to a speedup in Q219.
a. In particular, March Retail Sales sets the stage for a speedup in Consumer Spending.
b. The jump in March Core Durable Goods Orders should translate into a speedup in Equipment Spending in Q219.
c. The jump in March New Home Sales bodes well for residential construction as the weather improves in the Spring.
2. Nonfarm Inventory Investment was high for the second quarter in a row. While the conventional view is that high inventory investment is a negative for the next quarter's growth, this is not necessarily the case. Inventory investment generates income, which fuels consumption ahead.
3. Export strength is ironic, given all the attention on slow global growth.
4. Government Purchases, both Federal and State & Local, continued to climb notably.
5. While Motor Vehicle Output dropped 5.0% (q/q, saar), it subtracted only 0.2% pt from GDP Growth.
The GDP strength shows that the weakening in manufacturing surveys is just a small part of the overall economy story.
The low inflation prints during the quarter showed up in soft GDP and PCE Deflators. The y/y for the Core PCE Deflator fell to 1.7% (y/y) after being 1.9-2.0% in the prior 3 quarters.
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