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The rebound in growth over the first three months of the year was driven by inventories and international trade. The slowdown of the most cyclical components should not be of excessive concern to analysts. Jean-François Gillardin, Head of Discretionary Portfolio Management, offers some explanations.

First-quarter US growth figures exceeded consensus expectations. According to the initial estimate, gross domestic product (GDP) increased at an annual rate of 3.2% in the first quarter of 2019, compared to an expected 2.3%. This announcement nevertheless prompted a slight fall in sovereign bond yields on investor concerns about the composition of this growth.

The rebound in activity over the first three months of the year was driven by inventories and international trade. For the third consecutive month, inventories contributed positively to GDP – with companies deciding to increase their inventories because of the uncertainties relating to the trade war – prompting analysts to fear negative effects for subsequent quarters.

The same explanation applies to international trade. In the second half of 2018, fearing an escalation in trade tensions, American companies decided to import the goods they needed early, which had a negative impact on the US trade balance. Rumours suggesting positive progress in the negotiations had the reverse effect in the first quarter.

To gain a deeper understanding of the quality of the growth, it is better to focus on domestic demand (which measures growth without inventories and international trade) and look specifically at consumption and investment. In this respect, consumer spending particularly disappointed the markets with a rise of just 1.2%. More worrying, the consumption of durable goods – goods with a lifespan of more than three years – contracted sharply in the quarter.

The increase in investment spending (1.5%) was hardly much stronger. Here too, the most cyclical components were below par, both for residential and non-residential investment. In non-residential investment, business equipment expenditure (0.2%) barely moved, having been one of the main supports to investment in recent years. At the residential level, weak activity is nothing new: the real estate sector’s contribution to growth has been negative since the first quarter of 2018.

Proceed with caution

For the time being, the slowdown of these data is not yet overly worrying. Consumer spending has probably been negatively impacted by the forced shutdown of non-essential government services and by unfavourable weather conditions. In any case, the deceleration scenario is not an isolated event. A similar phenomenon had already occurred in the first quarter of 2018 with an even more limited rise in consumer spending (0.5%) as well as a contraction in the consumption of durable goods. Yet this did not prevent consumption from growing at a sustained pace for the rest of the year.

The decline in business leaders’ sentiment following the strong stock market correction in the fourth quarter of 2018 probably had a negative influence on corporate investment expenditure as did uncertainty over the trade war situation. The markets’ rebound and progress in the negotiations gradually reversed the trend.

Ultimately, the increase in American growth could be considered impressive in view of specific events in the first quarter (shutdown of non-essential government services and weather conditions). However, its composition invites caution. Although the deceleration of the most cyclical components of consumption and investment appears temporary at the moment, it needs to be closely monitored.

These latest data are not likely to influence the thinking of the Federal Reserve, which has become more dovish. In all likelihood, the Fed will maintain its monetary policy unchanged for the rest of the year. At this stage, it therefore seems to us still premature to anticipate a recession in the United States in the near term.

Jean-François Gillardin
Head of Discretionary Portfolio Management
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