IN THIS ISSUE:

1. 1Q GDP Rises 3.2%, Strongest Showing in Four Years

2. Why the Economy Greatly Exceeded Expectations

3. Implications For Fed Monetary Policy Going Forward

4. Medicare Insolvent by 2026, Social Security by 2035

1Q GDP Rises 3.2%, Strongest Showing in Four Years

The US economy has a tendency to lag in the 1Q following big holiday spending, but not this year. While there have been widespread predictions that the economy was slowing down and the recovery might be ending, the latest GDP report put all that to rest.

The Commerce Department’s Bureau of Economic Analysis (BEA), the arbiter of Gross Domestic Product, released its first estimate of 1Q GDP on Friday. According to the BEA, 1Q GDP rose 3.2% (annual rate), following 2.2% in the 4Q of last year. The BEA’s advance estimate of 1Q growth greatly exceeded the pre-report consensus of 2.3%.

[For newer readers, the “pre-report consensus” is based on surveys of economists taken by The Wall Street Journal, Bloomberg and others ahead of significant economic reports. It is always noteworthy to see if the actual report comes in above or below economists’ expectations.]

The better than expected growth in the 1Q was driven by solid inventory investment, stronger exports, lower imports, state and local spending and to a lesser extent, consumer spending. Spending by states and localities jumped 3.9% in the 1Q after falling by 1.3% in the 4Q.

Real GDP

Not everything in the GDP report was so rosy, however. Consumer spending rose only 1.2% in the 1Q, after healthy growth of 2.5% the previous quarter. Business investment also slowed, to 2.7% from 5.4%.

For all of 2018, the US economy grew at almost 3% for the first time in years – rising 2.1% in the 1Q, 4.2% in the 2Q, 3.4% in the 3Q and 2.2% in the 4Q. For all of 2018, the US economy grew to a new record level of $20.5 trillion. GDP is the sum of all goods and services produced in the US each year. Apprx. 70% of GDP is made up of consumer spending.

Despite the much stronger than expected growth, inflation remained low in the 1Q. Inflation, as measured by the Personal Consumption Expenditure Price Index, fell to a 1.4% annual rate in the 1Q, down from 1.9% in the 4Q. The stronger than expected GDP number amidst continued low inflation has implications for Fed monetary policy going forward – more on that below.