The economic forecasters to whom I listen state the following:
The economy expanded at a sluggish 0.7% qoq saar rate in 1Q. While this was clearly a weak showing, it was fairly consistent with expectations given the pattern over the past several years of depressed 1Q growth. This reflects "residual seasonality" where the BEA struggles to appropriately seasonally adjust the data at the start of the year, thereby redistributing growth from 1Q to 2Q/3Q. Within the components, there was particular weakness in consumer spending, government spending and inventories which was offset by impressive growth in both nonresidential and residential investment. We think the momentum in investment should lend itself to further growth in 2Q which will be coupled with a recovery in consumption, prompting a solid performance for the quarter.
On the upside, investment was quite robust with nonresidential structures investment up 22.1% and equipment up 9.1%, which is a decisive turn higher given the weak trajectory over the past several quarters. Residential investment was also strong, increasing 13.7% given the solid rise in housing starts and sales to start the year. But warm weather could have pulled forward housing activity from the spring months.
Bottom line: the guts within the GDP report were stronger than the headline implies, likely setting up for stronger growth into 2Q and 3Q. This leaves us comfortable with our forecast of low-2% average growth this year, accelerating from 1.6% in 2016.