U.S. Economy Continues Strong Growth

The U.S. economy grew by an annualized rate of 3.2% in the first quarter of 2019, according to the Bureau of Economic Analysis in late April.  The growth was surprisingly strong, as the consensus estimate of Dow Jones-polled economists had estimated a Q1 growth rate of 2.5%.  The reading from the first quarter inspired confidence, as many economists and Wall Street pundits have suggested a potential economic slowdown in 2019.  At least with respect to the first quarter of the year, no slowdown is in sight—the Q1 GDP number is the best first quarter number since 2015. Behind the strong growth numbers were several factors.  First, U.S. exports increased while imports decreased in the quarter. Second, inventories grew more than expected.  Finally, consumer spending was up slightly more than expected.  With the unemployment rate at 40-year lows and reasonable wage growth, the U.S. consumer is healthy and in a position to spend.  Combining all of the economic growth factors with a low inflation rate at the end of 2018 and real GDP for Q1 surged. The report is mostly a reason for optimism and supportive of continued growth in the financial markets.  Ultimately, the U.S. stock market is only as strong as the profits of the underlying public companies that comprise it.  With surprisingly healthy GDP growth comes a better foundation for profit growth across private industry.  While earnings estimates for U.S. companies have been more subdued for 2019, sustained GDP growth of above 2.5% will significantly improve the broad outlook. There are some aspects of the Q1 GDP report that do call for caution.  A significant build in inventories, like we witnessed in Q1, can create headwinds for a future quarter’s growth.  We may see more modest activity in Q2 and Q3 as a result of rising inventories—businesses have to work through their existing supplies before ordering more goods.  And while personal spending was healthy in Q1, it remains relatively subdued when comparing historical trends.  Still, the report on balance was more positive than negative. The final factor to consider is that these GDP reports are backward-looking.  Much like the reporting of jobs and unemployment data, the GDP growth report is a historical reading of what happened in the economy.  While it is an important consideration in understanding the health of the broad U.S. economy, the report does not forecast what will happen in future quarters.  We look to other economic data and signals, such as the shape of the yield curve and movements in credit spreads, to tell us about the prospects for future economic health in the U.S. In sum, we welcome an excellent reading on the health of the U.S. economy and remain diligent in monitoring the situation for the remainder of 2019.