WHAT DID WE LEARN LAST WEEK THAT’S A POSITIVE ON THE ECONOMIC FRONT?
According to the Commerce Department, the U.S.gross domestic product rose at a 3.2 percent annual rate in the first three months of the year. This is an impressive number, considering many economists and analysts have been concerned about the possibility of a recession in the past few months.
REMIND US WHAT GROSS DOMESTIC PRODUCT IS, AND WHY IT IS AN IMPORTANT THING TO MEASURE?
Gross domestic product, or GDP, the value of all goods and services produced in the U.S. Put simply, it measures the entire output of the country’s economy, and it is how we gauge economic growth or contraction. When looking at GDP growth, any growth rate above 3% annually is a good number for developed economies like the US or the EU.
WERE WE EXPECTING TO SEE SUCH POSITIVE GROWTH?
Most analysts did not expect such a great number this quarter. Just recently, the Atlanta Federal Reserve had projected Q1 GDP growth would be just .1%, and for good reason! They may be distant memories now, but in the first quarter, we had an extended partial government shutdown, a spell of crippling cold weather due to the polar vortex, and a worrisome February jobs report. All of these followed on significant stock market jitters at the close of 2018. Taken together, these seemed to foreshadow an economic slowdown.
SO WHAT IS DRIVING GDP GROWTH?
Trade was a big factor. In the first three months of this year, the value of goods we imported fell as a result of concerns about tariffs on goods from China and other countries. At the same time, the US exported more goods and services. This provided a boost for American manufacturers, as did greater inventory investment, which is essentially companies buying goods and services to produce their own products.
Solid consumer spending and state and local government spending on projects like roads also contributed to the strong GDP growth in the first quarter. Finally, the Federal Reserve’s decision to shelve its plans for continued interest rate hikes this year helped boost investors and corporate sector confidence.
ARE THERE WARNING SIGNS FOR THE MONTHS AHEAD?
The housing market continued to be a drag on the larger economy last quarter. Trade and inventory spending in a given quarter can distort the longer-term trends in the economy. That may be true here, as the trade landscape is very uncertain at the moment and quarters with high inventory spending are often followed by quarters with lower spending. Rising oil prices could also hit consumers and businesses alike. Finally, wage growth and consumer confidence will weigh heavily on whether consumer spending continues to be strong.
WHAT DOES THIS NEWS MEAN FOR EVERYDAY PEOPLE?
Between this strong GDP number on Friday and the outstanding corporate earnings reports from last week, anyone who owns stock has benefited. The S&P 500 and the NASDAQ hit new highs, and the Dow flirted with another record close. Overall, a strong economy should continue to keep unemployment low, which in turn should fuel higher wage growth for workers. Let’s hope the good news continues.
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