Fed Paper: Weak Consumer Key Drag on 1Q GDP, Not Seasonality

By Jean Yung

     WASHINGTON (MNI) - A new Federal Reserve research note throws cold water on

the theory that GDP growth in the first quarter of the year, at just 1.2%, was

understated because of residual seasonality. Rather, "considerably weaker"

consumer spending to start off the year held down growth this year and over the

past four years, they found. 

     Fed economists Paul Lengermann, Norman Morin, Andrew Paciorek, Eugenio

Pinto, and Claudia Sahm, in a paper published Friday, looked at GDP data over

the past 10 years and concluded growth in the first quarter has often been lower

than other quarters but that they "do not view residual seasonality as the

primary reason for the slowdown."  

     The pattern seems to be largely driven by "idiosyncratic factors," such as

severe winter weather in 2011 and 2014 or the rollout of new government health

care policies in 2014. One of the worst first quarter -- that of 2009 -- also

coincides with the depths of the Great Recession, they said. 

     Residual seasonality would exist if GDP showed "a predictable pattern of

ups and downs during the year even after attempts have been made to seasonally

adjust the data to remove calendar and holiday effects," they said. 

     There is no evidence of such a pattern across GDP broadly, though papers

have found signs of residual seasonality in some subcomponents of GDP such as

nonresidential structures, exports of goods, federal government spending

(especially defense spending) and state and local spending. 

     Still, "any reduction in residual seasonality in these components does not

show through materially to stronger first-quarter GDP, largely because

first-quarter consumer spending has been considerably weaker recently," they

said. 

     Consumer spending added only 1.3 percentage point to GDP growth in the

first quarter of this year, down from 2.0 percentage points in the fourth

quarter of last year. The likely explanation for the downshift appears to be the

sizable decline in motor vehicle outlays after dealers phased out the

unsustainably large incentives that boosted auto sales last year, the economists

said.

     They noted another interesting pattern: Consumer spending falls every two

years after federal elections as demand for professional advocacy nonprofits

such as political organizations swell and ebb. That category alone accounted for

0.3 percentage point less GDP growth in the first quarter of this year than in

the fourth quarter, they found.

     The Bureau of Economic Analysis is in the process of applying new seasonal

adjustment procedures and plans to make the adjustments to the entire history of

GDP data with its next comprehensive revision in July 2018. 

--MNI Washington Bureau; +1 202-371-2121; email: jean.yung@marketnews.com

[TOPICS: MMUFE$,M$U$$$]