Invesco: GDP Growth Dims, But We See Bright Spots Ahead

by Invesco

U.S. gross domestic product (GDP) output grew by only 0.7% annualized between January and March, we believe the underlying details of the data were supportive of stronger growth in the coming quarters...

As shown in the chart below, consumption was the big disappointment, expanding by only 0.3%, versus averaging around 1.6% growth since 2009. However, we believe that: 

• the current high level of consumer confidence,
• above average employment growth
• and rising pay

suggest that consumption is likely to bounce back.

Also, initial GDP releases have tended to misread consumption...so it’s possible we may get a positive upward revision.

Consumption’s contribution to growth disappointed in the first quarter

Source: Federal Reserve Economic Data (FRED), quarter-over-quarter, annualized, Oct. 1, 2009 – Jan. 1, 2017

Investment activity could bolster future growth

While the initial consumption figures were a detractor, the first-quarter expansion in investment activity was encouraging.

• Residential and non-residential investment showed signs of strength, growing 13.7% and 9.4%, respectively.

If investment and consumption stabilize at the levels we expect, we believe trend GDP growth will likely end up in the mid-to-high 2% range this year.

Invesco Fixed Income believes:

• the latest set of GDP data increases, rather than decreases, the odds of a June Federal Reserve rate hike...
• and these data raise the probability that the next several GDP reports will be above-trend.

(This  post is an edited excerpt of the original article.)