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In Q1 2024, our consumers spent very vigorously on services at the fastest growth rate since 2021, adjusted for inflation, but not so vigorously on goods. And private fixed investment jumped at the fastest rate in two years.
But dragging on GDP were the trade deficit, which worsened sharply on a majestic surge of imports, and federal government consumption expenditure and investment, after five quarterly spikes in a row. But we think that the slowdown in government spending was just a blip because we don’t see a slowdown in that department.
GDP, adjusted for inflation (“real GDP”), rose by an annualized rate of 1.6% in Q1 from Q4, following the 3.4% increase in Q4 , according to the Bureau of Economic Analysis today:
- Consumer spending (69% of GDP): +2.5%, on a 4.0% surge in spending on services and a 0.4% decline in spending on goods.
- Gross private investment (18% of GDP): +3.2%, pushed up by a 5.3% surge in fixed investments, and dragged down by a smaller increase in inventories.
- Government consumption and investment (17% of GDP) dragged on GDP: +1.2%, on a decline in federal government spending (the “blip”).
- Change in private inventories dragged on GDP.
- Trade deficit worsened a lot, on surging imports, and dragged bigly on GDP.
“Real” GDP in dollar terms, adjusted for inflation and expressed in 2017 dollars, rose to $22.77 trillion annualized in Q1:
The size of the US economy: “Current-dollar” GDP (or “nominal” GDP, not adjusted for inflation and expressed in current dollars) jumped by 4.8%, or by $327 billion, to $28.3 trillion annualized. This $28.3 trillion represents the actual size of the US economy, measured in today’s dollars, and is used for the GDP ratios, such as the US debt-to-GDP ratio.
As you can see in the chart below, “current-dollar” GDP growth in Q1 was similar to Q4: 4.8% v. 5.1%. But what happened in Q1 is that inflation re-accelerated sharply, and so on an inflation-adjusted basis, “real” GDP (see first chart) in Q1 grew a lot less vigorously than in Q4:
Consumer spending on goods and services rose by 2.5% in Q1 from Q4, to $15.7 trillion annualized and adjusted for inflation. This growth was slower than in Q4 (+3.3%).
- Spending on services jumped by 4.0%, the fastest growth since Q3 2021.
- Spending on goods dipped by 0.4%, driven by a 1.2% decline in spending on durable goods. Spending on nondurable goods was unchanged.
Adjusted for this re-accelerating inflation, consumers still, despite 5.5% Fed interest rates:
Gross private domestic investment jumped by 3.2%, to $4.2 trillion annualized and adjusted for inflation, a sharp acceleration from the 0.7% growth in the prior quarter. Of which:
Fixed investment: +5.3%, the fastest increase since Q1 2021, of which:
- Residential fixed investment: +13.9%. the fastest increase since Q4 2020
- Nonresidential fixed investments: +2.9%:
- Structures: -0.1%.
- Equipment: +2.1
- Intellectual property products (software, movies, etc.): +5.4%.
Still not back to the levels of investment during the free-money pandemic spike:
Government consumption expenditures and gross investment rose by 1.2%, to $3.9 trillion annualized and adjusted for inflation. It was the smallest increase since Q1 2022, pulled down by a decline in federal government spending, after the spike in the prior quarter.
This does not include transfer payments and other direct payments to consumers (stimulus payments, unemployment payments, Social Security payments, etc.), which are counted in GDP when consumers and businesses spend or invest these funds.
- Federal government: -0.2% (national defense +0.3%, nondefense -0.6%).
- State and local governments: +2.0%.
Government consumption expenditures and gross investment had surged five quarters in a row with quarter-to-quarter increases in the range of 3.3% to 5.8%, adjusted for inflation and annualized.
So this smaller increase was likely just a blip, because we haven’t seen a slow-down whatsoever in spending.
The Trade Deficit (“net exports”) in goods & services got a lot more horrible:
- Exports: +0.9%.
- Imports: +7.2% with goods +6.8% and services +9.0% (services imports includes the surge in spending by Americans traveling overseas).
Exports add to GDP. Imports subtract from GDP. Exports are much smaller in dollars than imports, hence the trade deficit, or negative “net exports.”
The worsening imports dragged GDP down by 0.96 percentage points. This means that if had remained at the same horrible levels as in Q4, GDP would have grown by 2.6%, instead of 1.6%.
The stimulus-driven buying binge of goods in the US during the pandemic, the subsequent restocking of goods inventories, and the lack of foreign tourism in the US (considered “exports” as money from foreign sources is paid to US businesses) caused the trade deficit to totally blow out in 2022. It then recovered some, but is far worse than in 2019. And Q1 was a big set-back and a major drag on GDP:
Change in private inventories subtracted 0.35 percentage points from GDP growth. Increases in inventories count as a business investment. Inventories rose by 1.2% annualized in Q1 to $3.0 trillion. But this growth rate was slower than the growth rate in Q4 (+1.9%) and so the slower growth rate was a negative contribution to the GDP growth rate.
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
