GDP Higher than Expected; No Injection from Tax Cut Apparent Yet
GDP growth provides a snapshot into the trajectory of the economy, which is certainly not supercharged. Although the current administration has advertised a return to historic growth rates, the economy continues to deflect outside intervention. Low interest rates failed to promote expansion above 3 percent annually, and now an injection of money in the form of tax cuts has yet to impact the pace of growth. Traditional market forces are guiding the steady, albeit measured pace of economic expansion.
In the first estimate from the Bureau of Economic Analysis, GDP grew 2.3 percent during the first quarter of the year. Growth was modestly above expectations and shows some room for upside in the coming quarters. Additionally, first-quarter GDP has been notoriously low during this recovery as the BEA’s seasonal adjustment has underrepresented the strength of the economy. Still, the expansion remains on a shallow trajectory and little impact from the tax overhaul was reflected in the first period it was enacted.
Nonresidential fixed investment was a major contributor to GDP in the first quarter, growing an annualized 6.1 percent and accounting for approximately one-third of the growth. However, the durable goods sector was a drag on the economy in the first quarter, anchored by lower auto and clothing orders. Overall, personal consumption was significantly lower in the first quarter than every period last year.
Weakness in the First Quarter Should Translate to Strength in the Second
Personal consumption should accelerate in the second quarter as more money flows into the pockets of consumers. Many tax payers may have delayed altering their tax withholdings, so the influx of capital into pocketbooks hasn’t been fully realized. Furthermore, auto sales rebounded in March and should be a larger contributor to GDP during the spring buying season. The housing market is also entering the buying season, which will result in an increase in durable goods orders in the form of big-ticket appliances and furniture. As a result, GPD growth should remain on track to finish the year in the high-2 percent range.
Will GDP Impact Real Estate Investors?
Nothing in the BEA’s first quarter estimate of GDP growth will significantly alter the direction of the equity, capital or real estate markets. Although expansion was above expectations, it was the lowest since the first quarter of last year. Upside potential exists, but not so much that the Fed will change the trajectory of interest rate hikes. With two additional rate hikes forecast for this year, and rising bond prices, the average 30-year mortgage rate could climb another 50 basis points by year end.
Overall, a path to economic growth above 3 percent remains elusive. As rates climb, the housing market should begin to cool, particularly on the coasts. Real median household income, meanwhile, is barely above the 1999 and 2007 peaks, while home prices are well above previous high watermarks. Higher rates will also slow auto sales and the economy as a whole until the next recession. While we expect this expansion to the longest in the post-war era, and the next recession will be much shallower than the last, no breakout year is on the horizon. As the period of prosperity enters later stages, investors are expected to diversify their portfolios to avoid losing a significant share of their portfolio in a market correction.
Sources: HomeUnion Research Services, Bureau of Economic Analysis, Automotive News Data Center, U.S. Census Bureau, Federal Reserve Bank