As we wrote three months ago, it's going to take much more than animal spirits to lift economic growth from the sluggish pace of the past several years. Measures of consumer and business confidence continue to perform much better than before the election. But where the economic rubber hits the road, in terms of actual production,...not so much.
It looks like real GDP growth will clock in at a 1.3% annual rate in the first quarter. This is slower than the recovery's average, but still within what we call the Plow Horse growth range. Until the US actually sees some major economic reforms – not just talk or tweets, but legislation that's actually passed into law – there will be no real acceleration in growth.
Hopefully, this happens soon, with measures that free up the health care sector and cut marginal tax rates, among other changes. But the waiting is the hardest part.
We get some data later this week and next week that may make us tweak our forecast – like Industrial Production, Orders for Durable Goods, and the Advance Report on Trade and Inventories – but we doubt we will get news that changes our current forecast in any significant way.
Here's how we get to our 1.3% forecast.
Consumption: Automakers reported car and light truck sales dropped at a 17.2% annual rate in Q1, the steepest decline since late 2009, right after cash for clunkers. We think sales will rebound in Q2, but the peak in auto sales is probably behind us. "Real" (inflation-adjusted) retail sales outside the auto sector grew at a 3.1% rate in Q1, but growth in services was weak, in part due to above-normal temperatures in in January and February that held down utilities. Our models suggest real personal consumption of goods and services, combined, grew at a 0.7% annual rate in Q1, contributing 0.5 points to the real GDP growth rate (0.7 times the consumption share of GDP, which is 69%, equals 0.5).