Optimism Rises as Q1 US GDP Forecasts Higher

GDP expected to grow better than previously thought

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The markets will be getting a preliminary glance into how the US economy performed as the first quarter GDP report will be coming out later this afternoon.

The report from the Department of Commerce is forecast to show a 2.2% increase in the quarterly GDP growth rate.

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While on one hand, this would be the same pace of growth seen in the previous quarter, the estimates have increased significantly. At the start of the year and into the first quarter, a slower GDP growth rate was a possibility.

U.S. GDP Growth

This came as the US economy started Q1 amid economic uncertainties. The Washington administration was in a trade battle with China and this led to prospects of lower growth. The temporary shift in the yield curve also spooked investors.

Various other economic indicators which started the year on a bleak note further added to the downside. Eventually, with inflation also easing, the Federal Reserve eased its foot from the pedal as it promised no rate hikes for the remainder of the year.

As a result, investors were more or less convinced that economic growth would sputter in the first three months of the year. However, data since February and March began to show a rebound in the economic activity.

Here’s a recap of some of the major economic releases that have shifted the expectations to a more optimistic outlook on the GDP growth.

Consumer Spending Remains Key Growth Driver

The most recent retail sales report saw the US consumer spending bouncing back. Retail sales for March rebounded strongly. Headline retail sales grew 1.6% on the month. This beat the modest estimates of a 1.0% increase. The March retail sales rebound was the strongest monthly gain since September 2017.

Adusted Retail Sales (m/m)
Adjusted Retail Sales (m/m)

Besides the solid headline, the retail sales control group which excludes autos, building materials and gas rose 1.0% on a month over month basis. Given the fact that this sub-report feeds directly into the GDP report, it reflects the total consumption on the consumer side.

When assessing the retail sales control group on a quarterly period, this grew 2.6% on a seasonally adjusted basis. The gains in consumer spending come amid a higher saving rate with the Fed funds rate at 2.50%.

Thus, in a way, with US interest rates slightly higher and with the promise of no further rate hikes for the rest of the year, this has translated into higher spending.

Investors currently view this as another upbeat business cycle and this evidently pushes back fears of a recession which plagued the markets earlier at the start of the year.

GDP Trackers Are Positive

The latest end of week assessment of the various GDP trackers has shown a significant increase.

  • The Atlanta Fed’s GDPNow model is forecasting a US GDP growth rate of 2.8%, which stands on the higher side of the estimates.
  • The NY Fed’s NowCast GDP model, on the other hand, is forecasting a GDP growth rate of 1.4%, which remains on the lower end of the range.
  • CNBC’s projections on the US GDP growth rate is showing a 2.1% average growth rate

Combining the above, one can conclude that the first quarter GDP growth rate could fall in line with the estimates of a 2.2% increase.

The optimistic projections come with the US labor market continuing to hit new records. The unemployment rate remains historically low and the lack of strong inflationary pressures are adding to the consumer optimism.

Most recently, the weekly jobless claims have seen continued declines hitting fresh 50-year lows marking another record in the labor market. Given the low inflation growth, steady interest rates, it is not surprising to see that consumer spending remains robust at this point.

If the actual GDP data does beat the estimates, investors will start looking to the Fed for its forward guidance. Given that the central bank pledged to keep rates unchanged, recent commentary from some Fed officials has shown that this view could change if the data continues to remain positive.

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