U.S. GDP grows by 0.5% in the first quarter

Initial estimates show that the U.S. economy grew by 0.5% (annualized) in the first quarter of 2016. It extended the downward slide seen since the second half of 2015. Real consumer spending came in better than expected at 1.9%. Consumption growth was led by robust services spending, but was held back by a decline in durable goods and weak non-durable goods spending (+1.0). Non-residential business investment was weak across the board as declining oil and gas investment still weighed considerably on overall investment. Residential investment, on the other hand, accelerated and added 0.5 percentage points to economic growth in the quarter. The other two factors weighing on growth were net trade and inventories, with both subtracting 0.3 percentage points from the headline.

The weak first quarter growth has been a common theme over the past decade. It is far too early to discount the possibility that economic growth bounces back with vigor over the coming quarters, as it has done in previous years. The discrepancy between the rate of job growth and economic growth is glaring and has gone on too long to ignore. The economy is likely operating close to its economic potential (given limited productivity growth) and, as evidenced in the labor market, continues to reduce economic slack. This will eventually lead to higher inflation.

I still feel comfortable that U.S. GDP growth will move back towards trend beginning in the second quarter and will grow somewhere between 2.0 and 2.5 percent in 2016.