According to Jerome Powell, the fundamentals supporting the US economy remain solid. First quarter growth has been robust but underlying concerns about the quality of growth have emerged. Growth has benefitted from a drop in imports and rising inventory levels while residential investment acted as a drag. In the coming months, imports should rebound and inventories should witness a scale back. The onus will fall on consumer spending and corporate investment to neutralise the effects of these anticipated headwinds on growth.
According to Federal Reserve Chairman Jerome Powell, the fundamentals supporting the US economy are solid. One can think of the very low unemployment rate, the sustained pace of job creation, the growth of real disposable income, corporate profitability, the level of real interest rates, etc. One ponders, though, whether solid fundamentals have translated into solid growth? The Bureau of Economic Analysis reported last week that in the first quarter, real GDP increased at an annualized rate of 3.2% versus the previous quarter1. At first glance, this shows a strong performance of the economy, with growth accelerating following a slowdown in Q4 (2.2%). However, the quality of growth is an issue. Personal consumption expenditures increased a meagre 1.2%, residential investment contracted for the fifth consecutive quarter while growth in equipment investment remained basically flat. In contrast, investment in intellectual property products continued to grow strongly (+8.6%).
