Putting the Q1 GDP Into Context

24, May 2017


Sluggish first quarter is expected during economic expansion 

By Tom Daly
Builder Partnerships Research Analyst


The economy is showing many signs of improvement, but the most recent GDP release was a bit disappointing. In late April, the Bureau of Economic Analysis announced an estimated GDP for the first quarter of this year of just 0.7 percent. However, this isn’t unexpected; first-quarter GDPs have tended to underperform predictions during this expansion cycle. Much of the cause for this lackluster GDP can be traced to a lack of consumer spending, and a relatively mild winter that led to less spending on utilities services. 

In previous years, the second-quarter GDP has generally shown a significant bounce back and that is the anticipation for this year as well. Predictions vary at this point; while Wells Fargo is predicting a second-quarter GDP growth of 2.9 percent, the Federal Bank of Atlanta raised some eyebrows by predicting a GDP of 4.1 percent.

The jobs report for April exceeded expectations and rebounded from a disappointing March. A total of 211,000 new jobs were added in April, and the unemployment rate fell to 4.4 percent; thus far in 2017, monthly job growth has averaged 174,000. Average  hourly earnings are up another 7 cents to $26.19, while the average work week is up 0.1 to 34.4 hours.  

While the current employment numbers are a positive for the economy as a whole, the tight labor market is a concern for the home building industry as workforce availability and high wages put a strain on growth. On the positive side, while the labor participation rate ticked down 0.1 percent to 62.9 percent, the participation rate for prime working- age employees increased 0.1 percent to 78.6 percent.

Although consumer spending has been relatively weak to start the year, consumer confidence for the most part has been riding a high since October of last year. April saw a slight decrease to 120.3, down from a March that had the highest consumer confidence level since December of 2000 at 124.9.

The two sub-indexes of consumer confidence— the Present Situation and Expectation indexes — showed a slight decrease for the month. The Present Situation Index measures consumer sentiment about the present economic situation, while the Expectations Index measures consumer sentiment about the short-term (six months) future economic situation. The Present Situation Index and Expectation Index remain high at 140.6 and 106.7 respectively. Since October, the Expectation Index is up 22.8 points. 

Residential construction increased at its strongest pace since the fourth quarter of 2015 at 13.7 percent. This was partly impacted by the mild weather, but experts are predicting the outlook for the industry remains positive going forward. Builder sentiment is up too; NAHB’s Housing Market Index was up 2 points to 70, just below the all-time high of 72 set in June 2005.  

Despite those positive numbers, some slightly disappointing building numbers were released this month. Housing starts fell 2.6 percent in April, mostly due to a 9.6 percent fall in the multifamily sector. The small decline could also be the result of the milder winter, leading to abnormally high numbers earlier in the year that would be difficult to maintain.  

Despite the month-to-month overall decrease, single-family unit starts were up slightly by 0.4 percent, and overall housing starts are up 0.7 percent over April of last year. Building permits were also down 2.5 percent for the month, but are still trending above starts.

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