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Get Four
|  | APRIL 29, 2004
By Michael Englund Not Bad for a "Disappointing" Quarter Wall Street may have had higher expectations for first-quarter GDP, but overall it's hard to find much real weakness The Commerce Dept.'s advance report on gross domestic product for the first quarter, released Apr. 29, came as a disappointment for those looking for outsize economic growth. The report showed a 4.2% rise in the headline GDP figure -- but well below economists' consensus forecast of 5%. However, one aspect of the GDP report did exceed expectations. The chain price index, the broadest measure of inflation for the economy, rose a much higher than expected 2.5% in the first quarter -- the strongest pace since the second quarter of 2001. Strength in the chain price figure was led by a 3.2% jump in the personal consumption expenditure, or PCE, index, the strongest growth since February, 2000. Overall, the price data reinforce that the cyclical lows for inflation are behind the economy -- and suggest another reason why the Fed will adopt a less dovish stance at the May 4 Open Market Committee meeting. The downside surprise for the headline GDP figure was in inventory growth, which only added $8 billion to output in the first quarter, well below the $20 billion to $30 billion figure Wall Street had expected. Government purchases, which grew 2%, were also well below estimates. Consumption growth was only slightly weaker than forecast, at 3.8%. This was due to an expected 4.8% drop in purchases of durable goods, alongside estimated growth rates of 6.4% for nondurables and 4.3% for services. TRADE SURPRISE. Some of the sales data in the report were actually more robust than expected. Fixed investment beat the forecast of a 5.4% rate, thanks to a hefty 11.5% increase for equipment and software spending. Residential construction spending growth came in as expected, at 2.1%, and the 6.5% decline in commercial construction may well mark the end of the recession for this depressed GDP component. And foreign trade, rather than having the expected negative impact on GDP, actually added $600 million in the first quarter, as the 3.2% growth rate for exports exceeded the 2% import growth rate. The first-quarter GDP data are already likely to be upwardly revised, given that Wall Street's assumption of lean first-quarter inventories may have to be raised when the March inventory reports are released over the coming month. Inventory accumulation accelerated through February and may actually gain steam in March, and recent production data seem to suggest this as well. For now, we at Action Economics have bumped up our second-quarter GDP estimate to 7%, but we may reduce this forecast if data confirm the need to adjustment the first-quarter data higher. Though the market may focus on the shortfall in the headline first-quarter GDP number, most economists will recognize that either this 4.2% figure will be revised higher, or the second- and third-quarter GDP gains will be whoppers. Either way, it's hard to find any real weakness in the first-quarter report.  Englund is chief economist for Action Economics Edited by William Andrews
BW MALL
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