skip navigation

By the Numbers

Featuring brief segments of economic analysis from our senior economist Michael Bazdarich, PhD.

The economic analysis we previously featured in By the Numbers is now available on the Western Asset Blog. This page will no longer be updated.

The Saga of 1Q GDP

GDP growth for 1Q18 came in this morning at 2.3%, a bit above consensus guesstimates of around 2.0% and well above our own guesstimate of 0.9% growth. Consumer spending growth was as soft as expected, growing at a 1.1% rate, compared to 4.0% in 4Q17. Business equipment investment was softer than expected rising at "only" a 4.7% rate, versus growth over the previous year of 8.9%.

However, that softness in demand was offset somewhat by unexpected gains in inventories and foreign trade, both of which had looked like they would subtract from 1Q18 growth. That left 1Q18 growth below the pace of preceding quarters, but better than what was feared might be the case.

The story of 1Q18 GDP growth has been a real saga. Back in February, 1Q18 growth estimates were as high as 5.4%. Those estimates then came down steadily and sharply as actual data for the quarter have rolled in. Even as the outlook for 1Q18 growth softened, analysts were quick to disparage the slowdown as a fluke.

No, there wasn't any spate of blizzards or natural disasters restraining 1Q18 activity. Rather, the data just didn't match the narrative of accelerating economic growth, so it was explained away.

It all comes down to that blockbuster November retail sales print we have talked about so much in previous "By the Numbers" installments. That strong sales gain seemed to signal just the acceleration in consumer spending that various analysts were expecting. It also single-handedly boosted demand growth within the 4Q17 GDP data.

However, again, retail sales have since been soft enough to reverse all the above-trend spending signaled by November retail sales. As reported above, consumption growth dropped to 1% in 1Q18, from 4% in 4Q17. The 2.5% average growth for the last two quarters is right in line with growth we recently experienced, i.e., no acceleration.

The accompanying chart compares growth in domestic demand and GDP. As you can see, GDP growth perked up in 2Q17 and 3Q17, even while demand growth was lackluster. Demand growth then perked up in 4Q17, thanks to that November retail sales print, but it has since come back to ground.

To our eyes, it is 4Q17 that looks like the aberration, not 1Q18. Meanwhile, note that nothing in recent experience looks to be a notable departure from the experience of the last five years. Yet, consensus thinking is locked onto the notion that growth is picking up from its Obama-era torpor.

We think otherwise, but our take is contrarian. Going forward, consumer demand will most likely perk up over the rest of the year from its 1Q18 pace. However, it is doubtful that inventories and foreign trade can continue to boost GDP growth the way they did in 1Q18. We anticipate growth in the 2.0%–2.25% range over the rest of the year, compared to Fed forecasts of 2.7% and some Wall Street forecasts of around 3%.

Growth in Real GDP Versus Domestic Demand
Growth in Real GDP Versus Domestic Demand
Source: Bureau of Economic Analysis. As of 31 Mar 18

Michael Bazdarich

Product Specialist/Economist

Mike brings more than 45 years of experience to his position. "By the Numbers" will address economic data releases that are pertinent to a broad range of investors.

Prior to joining the Firm in 2005, Mike ran his own consulting firm, MB Economics. He earned his PhD in Economics at the University of Chicago.

Sign up to receive email updates as new reports are released.

© Western Asset Management Company, LLC 2022. This publication is the property of Western Asset and is intended for the sole use of its clients, consultants, and other intended recipients. It should not be forwarded to any other person. Contents herein should be treated as confidential and proprietary information. This material may not be reproduced or used in any form or medium without express written permission.
Past results are not indicative of future investment results. This publication is for informational purposes only and reflects the current opinions of Western Asset. Information contained herein is believed to be accurate, but cannot be guaranteed. Opinions represented are not intended as an offer or solicitation with respect to the purchase or sale of any security and are subject to change without notice. Statements in this material should not be considered investment advice. Employees and/or clients of Western Asset may have a position in the securities mentioned. This publication has been prepared without taking into account your objectives, financial situation or needs. Before acting on this information, you should consider its appropriateness having regard to your objectives, financial situation or needs. It is your responsibility to be aware of and observe the applicable laws and regulations of your country of residence.
Western Asset Management Company Distribuidora de Títulos e Valores Mobiliários Limitada is authorized and regulated by Comissão de Valores Mobiliários and Brazilian Central Bank. Western Asset Management Company Pty Ltd ABN 41 117 767 923 is the holder of the Australian Financial Services Licence 303160. Western Asset Management Company Pte. Ltd. Co. Reg. No. 200007692R is a holder of a Capital Markets Services Licence for fund management and regulated by the Monetary Authority of Singapore. Western Asset Management Company Ltd is a registered Financial Instruments Business Operator and regulated by the Financial Services Agency of Japan. Western Asset Management Company Limited is authorised and regulated by the Financial Conduct Authority (“FCA”) (FRN 145930). This communication is intended for distribution to Professional Clients only if deemed to be a financial promotion in the UK as defined by the FCA. This communication may also be intended for certain EEA countries where Western Asset has been granted permission to do so. For the current list of the approved EEA countries please contact Western Asset at +44 (0)20 7422 3000.