A quarterly GDP report doesn’t seem like the most contentious thing in the world. It seems boring and routine, but the 1Q report from last Friday is surprisingly controversial.
Let’s back up and explain: the 1Q GDP report was anticipated to be a little muted due to trade concerns and the January government shutdown, with most projections in the 2.0% - 2.5% range. Instead, the 1Q GDP number hit a seasonally adjusted rate of 3.2%, materially above the highest range of forecasts. Naturally, the analysts started to pore through the report, trying to figure out where they went wrong. After sorting through the details, the analysts came back with more questions.
First, consumer spending – the primary driver of the economy – was slowing down in 1Q, so how could GDP be up? Instead, the largest attributed reason for the unexpected growth acceleration came from inventory buildup. In other words, businesses increased the supply of goods for sale, but higher inventories don’t always mean organic growth. Inventories go up and down but that doesn’t translate to long term steady growth, just a neutral cycle of goods moving from factories to warehouses to retail environments. Today’s stockpile of goods can mean fewer purchases in subsequent quarters since there is an oversupply glut. Today’s rising inventory can be considered borrowed-growth from the future. Moreover, analysts had questions about the source of the inventory buildup, since both production and imports fell. Goods have to come from somewhere – and if they are not produced in the US or imported, where did they come from?