MNI 5 THINGS: Softer PCE To Fuel US GDP Slowdown;Downside Risk

By Holly Stokes

     WASHINGTON (MNI) - First quarter GDP advance report will be released

Friday, with the median forecast among analysts in an MNI survey calling for a

2.0% gain in GDP and a 2.4% rise in the chain price index.

     Ahead of the release, we outline five themes for particular attention.

--DOWNSIDE RISK TO GDP

     In the past two years, analysts have shown a clear tendency to overestimate

advance reports of GDP. Analysts have overestimated the advance report six of

the last eight quarters. Further, when analysts overestimate, they miss by a

larger degree than when they underestimate, with an average overestimate miss of

0.43 compared to an average underestimate of 0.25. This suggests a downside risk

to analysts' forecast of +2.0%. However, there is an upside risk to the GDP

Price Index of +2.4%, as analysts have underestimated the index's advance print

six of the last eight quarters.

--SEASONAL FACTORS POTENTIALLY DOWNPLAY UNDERLYING STRENGTH

     Despite recent efforts in revisions to eradicate residual seasonality, the

first quarter continues to be haunted by slower growth compared to the rest of

the year. Since 2010, which marks the first full year of economic recovery,  the

first quarter has posted softer growth than the following three quarters'

average in five of the last eight years. Further, since 2010, first quarter GDP

growth has averaged 1.2% growth, while the other three quarters have a notably

stronger average of 2.5%. Though the forecast for 2.0% growth in first quarter

follows the trend of a first quarter slump, it is stronger than the recent first

quarter average, and if realized would indicate some underlying strength in the

face of residual seasonality. 

--MARKETS EXPECTING STRENGTH, WILL LIKELY BE DISAPPOINTED 

     Market participants expect first quarter GDP growth to come in much

stronger than analysts expect, with a whisper number of 2.9%. Not only would

this diverge from the recent trend of residual seasonality that has kept the

first quarter soft, but it also seemingly contradicts recent weeks' buzz around

an inverted yield curve as market participants had expected softer growth and

inflation. If a 2.9% gain is realized, this would likely boost rate hike

expectations and hammer the front end of the curve. However, the chances of a

3.0% jump coming to fruition are unlikely, given markets history of large

misses. In the past six quarters, the whisper number has missed the advance

report by an absolute average of 0.70, compared to analysts' smaller 0.28 miss.

Further, as analysts and markets typically miss to the same side of the first

print, and analysts have a track record of overestimating the advance, there is

a sharp downside risk to the whisper number.

--SOFT CONSUMER SPENDING

     In the fourth quarter, consumption was the largest contributor to GDP,

contributing 2.75pp at an annual rate. However, first quarter will likely be

much softer, as analysts brace for some payback after holiday shopping and the

end of hurricane-boosted spending. Already released retail sales data for the

first quarter shows a marked shift in quarter/quarter spending on an annualized

basis, posting a meek 0.8% rise in the first quarter after a 10.4% surge in the

fourth. While retail sales do not directly correlate with personal consumption,

this data does suggest muted spending despite tax cuts boosting disposable

income. Further, an MNI calculation, using January and February data, shows that

first quarter real PCE quarter/quarter on an annualized basis is tracking at a

soft 0.6% gain after last quarter's 4.0% rise. 

--INVESTMENT TO GIVE NET POSITIVE CONTRIBUTION 

     Residential investment is expected to be softer in the first quarter, after

surging 12.8% in the previous. This comes as hurricane rebuilding efforts are

finally dissipating from the data. However, with Tuesday's strong upward

revision to new home sales in the first two months of the year, as well as a

strong 694k print for March, the data suggests that the yet to be released March

residential construction should be a positive contribution to GDP. An MNI

calculation based off of only January and February shows that private

residential construction was +6.3% quarter/quarter on an annualized basis.

Business investment is expected to add a steady boost to economic growth

following tax reforms. However, soft capital goods ex-aircraft readings for

durables orders and shipments for March provide some downside risk.

Additionally, analysts look for a rebound in inventories after they slowed to a

$15.6 billion annualized rate of growth from $38.5 billion in the third quarter.

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

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