This morning’s advance GDP estimate for 1Q13 came in at 2.5% vs expectations for 3.0%. Belying the headline miss were some positive under the hood dynamics relative to our view on domestic consumption. Consumer Spending growth accelerated for a third consecutive quarter, growing 3.2% sequentially vs expectations for 2.5%, and contributing +2.24 to the Total GDP figure on the quarter. Investment grew 12.3% q/q alongside some inventory build and continued strength in Residential and NonResidential Fixed Investment. Government Spending showed some unsurprising weakness, declining 4.1% Q/Q with National Defense leading the decline with Gross Investment and Consumption Expenditures down 30.3% and 8.3%, respectively. To summarize:
C: Consumer coming in stronger than expected printing 3.2% vs. expectations for 2.8%. Contributing +2.24 to total GDP.
I: Investment up +12.3% Q/Q and contributing 1.56 to Total GDP. Inventories, Residential & Nonresidential Investment all positive contributions.
G: Down 4.1% Q/Q on the back of -7.0% in 4Q12. Contributing -0.8 to total GDP
E: Net exports contributing -0.5 to total GDP as growth in imports outran export growth.
Inflation: Core PCE remained subdued at +1.2% which continues to lend itself to steady-as-she-goes monetary policy. While we think employment could surprise on the upside over the NTM and Fed board commentary has been incrementally hawkish, with sequester related fiscal drag uncertainty unlikely to ebb through 3Q, inflation below target of 2.0% and the “transiently tolerable” 2.5%, employment growth still modest, and a significant output gap remaining, we don’t hold expectations for a material policy inflection over the intermediate term.
GIP Model: On the fundamental side, 1Q13 GDP growth agreed with our Growth/Inflation/Policy (GIP) model estimate which called for accelerating growth and decelerating inflation and a move to Quadrant 1. Simply put, if you are modeling the national economy as you would a company, Quad 1 (Accelerating Growth, Decelerating Inflation) equates to accelerating topline growth alongside margin expansion – You want to be long that. Our early estimate for 2Q has the U.S. holding in Quad 1.
In short, today’s GDP release offered positive confirmation of our 1Q13 theme for domestic consumption #GrowthStabilizing. While its (still) hard to pin a bullish secular thesis on peak margins, a low single digit and declining savings rate, and a positive spread on spending growth vs. income growth alongside already zero bound interest rates, in the near-term, the game plan remains much the same as its been YTD. Housing and Labor market trends remain positive for domestic consumption while declining government deficit spending, a benign domestic monetary policy outlook, a bearish setup for the Yen, and a weak growth/dovish policy outlook for the EU should all continue to support $USD strength and ongoing commodity deflation.
Christian B. Drake