First-quarter 2018 economy performed better than expected
The U.S. economy remained in gear during the first quarter of 2018 with gross domestic product expanding at a moderate pace of 2.3 percent, according to the federal Bureau of Economic Analysis. That was slower than the previous three quarters (which averaged about 3 percent) but still the strongest first-quarter reading in three years and remains in keeping with the regular pattern of the economy losing momentum in the first quarter each year. Members of the Federal Reserve’s Federal Open Market Committee anticipated the slowdown during the March meeting but said they expected it to be temporary.
The better-than-expected start to 2018 could be due in part to strong March retail sales (up 0.3 percent monthly and 5 percent year-over-year) helping to revert some of the weakness evident during the first two months of the year. The median of Open Market Committee members’ projections for the growth rate of real GDP this year is 2.7 percent. That is consistent with NRF’s forecast that GDP will grow 2.5 percent to 3 percent, which in turn is one of the underpinnings of our forecast that 2018 retail sales will grow between 3.8 percent and 4.4 percent over 2017.
It is not completely surprising that Americans might have taken a break during the first quarter as spending dialed back in both January and February. GDP grew at 2.9 percent in the fourth quarter of 2017, largely due to the surge in household spending of 4 percent on durable goods such as cars and appliances, impressive holiday season purchases and replacement purchases for property damaged by last year’s hurricanes. The widely publicized tax cuts signed into law near the end of the holiday season might have pulled spending into 2017, which would help explain the meager 1.1 percent increase in consumer spending in the first quarter of 2018.
Fed Chairman Jerome Powell provided an upbeat assessment of the economy and inflation after the March Open Markets Committee meeting: “Although the growth rates of household spending and business investment appear to have moderated early this year, gains in the fourth quarter were strong and the fundamentals underpinning demand remain solid. Indeed, the economic outlook has strengthened in recent months.”
The economic fundamentals referenced by Powell remain in place and are positive. There is rising household net worth, corporate profits are good, consumer sentiment is still at a cycle high and there are impressive gains in payrolls and the labor force participation rate. The economy appears to be poised to continue to build on the consumer. Consumer spending typically accounts for more than two-thirds of GDP, so it has an outsized effect on the pace of the economy. Consumers remain in action and are a key driver now that we are in the second quarter. Overall, stronger economic growth and continued tightening in the labor market have helped push up wages and benefits as one might expect. The Employment Cost Index increased 0.8 percent in the first quarter and is up 2.7 percent over the past year. The tight labor market, which is exerting pressure on wages along with the tax cuts, should provide support for increased spending. Economic indicators at the end of April were consistent with ongoing moderate GDP growth.
In anticipation of April’s retail sales results, cool temperatures seen during the month theoretically could have depressed sales of weather-related goods. However, as that didn’t seem to happen during March despite similar cold weather for a large swath of the United States, we don’t expect a negative impact on April. With the new tax plan in effect, additional take home pay and extra spending power could offset any weather-related softness in spending, and households remain upbeat about the economy.
Download this month’s report, which includes the following charts and highlights:
- Consumer sentiment
- Retail jobs
- Retail sales
- Consumer spending and income
- Retail employment
- Consumer price index
- Consumer credit
- Leading economic index