U.S. economic data showing significantly better-than-expected gross domestic product (GDP) growth in the first quarter of 2019 surprised the markets on Friday morning, but analysts have warned that the figures beneath the headline tell a different story.
The Bureau of Economic Analysis (BEA) said the U.S. economy grew by 3.2 percent on an annualized basis in the first three months of the year, much higher than the 2.5 percent markets were expecting. This is the first of three estimates—and the figure could change.
According to the BEA, the acceleration in GDP growth was the result of higher state and local government spending, investment by private companies in building up their inventories of goods and materials, more exports, fewer imports and a smaller decrease in housing investment.
"Fab Q1 GDP print (3.2pc)...till you look under the hood and kick the tires," Megane Greene, global chief economist at Manulife Asset Management, wrote on Twitter.
"Inventory buildup will have to be unwound (which will drag on growth), imports were weak (everyone front ran the tariffs last year) and defense spending was strong (but rest of govt spending weak)."
According to the consultancy Oxford Economics, a better measure of the underlying strength of economic growth is the figure for final sales to domestic purchasers, which does not include volatile trade data.
This figure slowed to 1.4 percent in the first quarter from 2.1 percent, BEA data shows, reflective of weakening demand in the economy.
Using the same measure but only for private sales, excluding government purchasers, the quarterly slowdown is even sharper, from 2.6 percent to 1.3 percent in the first quarter.
Oxford Economics noted said the composition of the strong number for headline GDP growth reveals that the economy is "undeniably cooling," citing weak consumer outlays, slower business investment, and yet another contraction in residential investment.
But it continued: "Today's report bolsters our view that the soft patch in early Q1 was temporary, and that concerns over an imminent US recession were overblown. While the economy will continue to slow from its 2018 brisk pace, firmer economic momentum at the end of Q1 and a rebound in consumer spending should support GDP growth around 2.5 percent in Q2.
"However, the large inventory build in Q1 poses a downside risk to GDP growth in coming quarters."
Pablo Shah, senior economist at the London-based consultancy Centre for Economics and Business Research (CEBR), also said the data points to underlying weakness in the U.S. economy.
"Although the headline rate is undoubtedly strong, there are several factors underlying the data which provide for a less rosy picture," Shah said.
"More than two-thirds of the growth generated by investment can be accounted for by the accumulation of private inventories. This is a highly volatile metric and is, therefore, a less reliable measure of an economy's underlying health.
"Meanwhile, the positive effect of net exports was primarily driven by a 3.7 percent annualized contraction of imports in Q1 2019, suggesting that the raft of tariffs currently in place on US imports are having an impact on spending decisions."
The CEBR forecasts 2.2 percent GDP growth for the U.S. across the whole of 2019.
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