US GDP data out last week shows consumer spending dramatically slowed, but on the other hand business investment accelerated. What does this mean for the US economy and the USD?
US GDP data for 1Q17 was released last Friday. It showed just 0.7% annualised growth for the quarter, but this isn’t of concern for three main reasons:
- Consumer spending was the major cause for the slower growth - its slowest rate since 2009. Pessimism amongst Democrat voters is currently extreme but history suggests this won’t last.
- Business investment, a critical component for the longer term health of any economy, showed a steep jump, boding well for coming quarters.
- It is just the preliminary estimate with the first quarter notoriously inaccurate and a strong chance of business inventories being revised upwards in the subsequent releases.
US Consumers particularly divided
US Consumer Sentiment, as surveyed by the University of Michigan, is currently near its highest point for the past 15 years, as shown in
Figure 1. Overall, it’s good news, but the division between Democrats and Republicans is at a record high.
Index of Consumer Sentiment, 2002 to 2017
Figure 1
Source: University of Michigan
The same survey showed that the overall consumer population “Index of Consumer Sentiment” is at 97.0 compared to 89.0 in a year ago and 90.7 just prior to the US election. But Democrats were at just 61.4 compared to Republicans 112.4. That gap of 51 compares to the post election gap in the Reagan and Obama elections of 16.5 and 17.2 respectively.
Consumer sentiment tends to have more of an impact when negative than positive, that is, negative sentiment has a much greater impact than the additional spending consumers make if feeling positive. This means the negative impact on spending of the Democrat supporting consumers will outweigh the positive impact on spending from Republicans.
Independents (non aligned) voters are feeling much more positive about the economy now than they were prior to the election. The non partisan portion of the population is 42%, compared to 30% for the Democrats and 28% for the Republicans, so it has the greatest impact. So, as long as Democrat voters’ start to get more comfortable with the economy again, consumer spending can be expected to return to around 2.5%pa growth, boosting the overall economy again. But this level of partisan split on expectations is unprecedented so it certainly warrants close monitoring in coming months.
Business investment
Non residential investment growth, comprising investment in equipment, structures (excluding residential) and intellectual property, rose an annualised 9.1% in Q1.
Nearly half of this jump is in mining and oil shafts, not surprising given Trump’s support of more US exploration sites and the stability of the oil price in recent months. If it continues this trend it’s good news for oil industry services companies such as Ausdrill.
Another major jump was in Industrial Equipment and Transportation Equipment, each moving more in the first quarter than they have any year since 2011.
Annual change in non residential private investment (%) and mining investment (quarterly, billions)
Figure 2
Source: FRED, RBA Business investment growth has been around 50% lower since the GFC, despite the huge rise in oil exploration investment. Whether this particular “Trump-bump” continues will be something to review in coming months, but if it does, this could unlock significant amounts of corporate cash reserves and result in a welcome boost for the economy.
As a technical sidenote, inventories are not included in the preliminary GDP estimate and if they have moved significantly, as they have in the past, may cause a major revision in GDP estimates. Given the renewed business investment evident elsewhere in Q1, it is likely that inventories will cause a sharp upwards revision.
Conclusion
First quarter GDP growth was weak, but you are unlikely to see much reaction from financial markets for the above reasons, and any reaction will be short lived once GDP revisions are released. Looking ahead for the rest of 2017, Trump wanted to provide confidence to businesses to invest again, and create jobs. As painful as it is for this writer to state, he seems to be getting this one right so far. If the Democrat consumers become more confident in the economy in time, 2017 GDP in the US will likely slightly outperform expectations.