Snapshot - Economics

Robust US growth figures calm recession worries

Weaker inflation suggests interest rates are likely to remain on hold

26 April 2019

Janet Mui

Janet Mui

Global Economist, Cazenove Capital

  • US GDP expanded by a surprisingly strong 3.2% in Q1
  • Inventories and net trade contributed to growth; domestic drivers including household consumption slowed
  • Inflation also slowed, suggesting the Federal Reserve will keep interest rates steady

US GDP expanded at a robust +3.2% quarter-on-quarter (q/q) annualised in the first quarter of 2019 (after +2.2% in Q4 2018), a big upside surprise versus consensus estimates of +2.3%. Encouragingly, all expenditure components of GDP contributed positively to growth and should help to dismiss recession concerns.

However, the mixture of growth suggests underlying demand was less robust. For example, the more volatile components such as inventory change and net trade added a combined +1.7% to Q1 GDP growth. This suggests some potential reversal in growth in the coming quarters.

Domestic drivers of growth appeared less impressive than the headline GDP: household consumption growth slowed to just +1.2% from +2.5% in Q4 2018 and contributed only +0.8% to growth. Meanwhile, fixed investment growth slowed to +1.5% from +3.1% in Q4 and, in particular, residential investment detracted growth for the fifth consecutive quarter.

Despite the stronger headline GDP growth, the personal consumption core price index (core PCE) slowed to +1.3% q/q from +1.8% q/q in Q4, modestly lower than estimates of +1.4%. This inflation measure is closely watched by the Federal Reserve.

Overall, the weakness in core PCE inflation as well as mixed growth drivers are likely to support the Federal Open Market Committee’s patient stance in not hiking interest rates this year.

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