_U.S. gross domestic product: Better than it looks

Buried in the data are some key takeaways for commercial real estate. 

• GDP increased 0.7% at an annualised rate in the first quarter (the black line in the adjacent chart). It was the weakest performance in three years and trailed the 1.0% median forecast in Bloomberg’s survey of economists.
• In a reversal from recent quarters, business investment (called non-residential fixed investment by economists) led the way, surging by 9.4% in the first quarter thanks to improving profits and positive sentiments in the early weeks of the Trump administration. Investment in structures, a subcategory of business investment, was especially robust, spiking by 22.1%. Business investment overall added 1.1 points to first quarter GDP. 
• Residential investment was also a big contributor, adding 0.5 points to growth as housing demand continues to drive construction and pricing.
• Consumer spending was surprisingly weak, despite solid job growth, strong housing and equity prices and elevated confidence. Personal consumption, which accounts for more than two-thirds of the economy, added just 0.2 percentage points to first-quarter GDP. Easter and Passover were relatively late this year, which could have pushed spending into the second quarter, and a late snowstorm in the Northeast had a similar effect. 
• Net exports eked out a 0.1% contribution to GDP.
• On the negative side, inventories subtracted 0.9 points as companies worked down the surge in inventories from the previous quarter.
• Government spending was also a small negative, subtracting 0.3%.
• The Fed’s favored measure of inflation, the core personal consumption expenditures index, which excludes food and energy, increased to 2.0% at an annualised rate in the first quarter, up from 1.3% in the fourth quarter. Inflation has returned to the Federal Reserve’s informal 2.0% target after several years of substandard growth.

Several takeaways from today’s report:

• The big drags on first-quarter GDP growth – consumer spending and inventories – are likely transitory. The economy is setting up for stronger growth in the second quarter.
• First-quarter GDP growth has trailed full-year performance for several years, suggesting some data measurement issues are at play.
• Business spending, a key driver of demand for commercial real estate, will continue to fuel the economy on the back of solid profit growth, oil and gas investment and an improving outlook for the global economy.
• Although second-quarter growth will be stronger – potentially 3.0% or better – the Trump administration will have a hard time sustaining this level of performance without stronger productivity growth, requiring investments in infrastructure and education. Slow growth of the labour force as baby boomers retire is another restraint on GDP, but technological advances such as the replacement of human labour by robots could increase GDP even as it intensifies the need for retraining workers who lose their jobs and improving the social safety net during the transition period.
• Despite the weak first-quarter GDP report, inflation is heating up, clearing the path for Fed officials to continue raising interest rates gradually this year.

Written by Robert Bach, Newmark Grubb Knight Frank, Director of Research – Americas.

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