The key indicator on the health of the U.S. economy is our gross domestic product, or GDP. It is the total dollar value of goods and services produced by the American economy. The GDP report, released each month by the U.S. Department of Commerce, is the metric by which we gauge our nation’s economic strength.
For much of the past 10 years, the annual rate of U.S. economic growth was a very modest 1.8 percent. But in 2017, the economy grew by 2.2 percent. In 2018, it surged by 2.9 percent. Despite last year’s stellar growth, there have been concerns of economic fatigue. In the second half of 2018, the pace of growth fell from 4.2 percent in the second quarter to just 2.2 percent in the fourth quarter. For the markets, this end-of-year pullback suggested a troubling prospect — a weakening global economy, Federal Reserve hikes and the U.S.-China trade dispute were finally taking a toll on American consumers and businesses.
The latest GDP report gave the markets an initial glimpse at the state of the economy during the first quarter, and it delivered a surprise. In the first quarter, the economy grew at an annual pace of 3.2 percent, soaring above the consensus estimate of 2.3 percent. It was the economy’s best first quarter result in four years. So, does this mean America’s economic concerns have suddenly disappeared? To answer, we need to dig a bit deeper into the GDP metrics and focus on its key component — the American consumer.
When it comes to economic growth, the American consumer reigns supreme. Consumer spending drives more than two-thirds of all economic activity. In the first quarter, consumer spending rose at an annual rate of just 1.2 percent — down from the fourth quarter’s pace of 2.5 percent.
With the mounting pressures of global economic weakness and trade disputes, the markets weren’t expecting a big increase in first-quarter consumer spending. Historically, there tends to be a temporary and seasonal pullback coming off the November-December retail holiday shopping season. However, a 1.2 percent growth rate passed the “good enough” test, alleviating concerns first-quarter consumer spending would fall off a cliff, taking the U.S. economy with it.
Despite the stellar first-quarter GDP growth, the U.S. economy is not entirely out of the woods. Admittedly, much of the 3.2 percent growth rate derived from a boost in net U.S. exports. In the following quarters, the markets will be expecting a much stronger rate of growth for consumer and business spending, the more desirable components of the U.S. economic growth equation.
As we depart from the first quarter, the U.S. economy has some tailwinds to help push it forward. The Federal Reserve, for now, has ceased raising interest rates. From 2017-2018, the Fed imposed seven rate hikes, which increase the cost of borrowing and act as a constraint on economic growth. The U.S.-China trade dispute, now into its second year, is expected to conclude in the upcoming weeks. Also, the U.S. labor market remains strong, fueling wage growth to its fastest pace in nearly a decade.
The first-quarter GDP report did help bypass concerns of an economic fallout while showing the economy is still on solid footing. Consumer spending should pick up in the second quarter, driving further economic growth. Though the report was not great, it seemed it be good enough. And for now, “good enough” is considered a huge win.