We are likely to see another healthy quarter of GDP growth in the first quarter, with growth coming in just below 3.0 percent. The index of aggregate hours for the quarter increased at just a 1.0 percent annual rate, which means that we should be seeing another strong productivity growth number for the quarter. This increases the likelihood that we are now on a path of faster productivity growth.
The GDP report will also provide data on the Personal Consumption Expenditure (PCE) deflator for March. The inflation data in both the Consumer Price Index and PCE deflator have come in markedly higher in the first quarter than in the fourth quarter of last year. It is still not clear whether this reflects an actual uptick in the inflation rate or simply some unusual seasonal effects and erratic movements in some series.
Both the PCE deflator and the core are likely to come in at close to a 3.0 percent annual rate in the quarter. This follows increases in the two indexes in the fourth quarter of 1.8 percent and 2.0 percent, respectively. This sort of rise is a reversal of the downward trend for the last year and a half, but with rental inflation virtually certain to slow sharply, and goods prices flat or falling at the producer price level, there are solid reasons to expect the pattern of disinflation to resume in future quarters.
Another Strong Productivity Quarter Strengthens the Case for Faster Trend Growth
Productivity data are notoriously erratic, but if we get another quarter of near 2.0 percent growth, it will be further evidence that we are seeing an upturn in the trend of productivity growth. This would put the year-over-year growth rate above 3.0 percent. However, this follows a year in which productivity actually fell, so we do need to see more data before being confident about a faster growth path.
This does matter hugely for the inflation outlook. If productivity growth is near 2.0 percent going forward, we can sustain a 4.0 percent rate of nominal wage growth and still hit the Fed’s inflation target, even without any reversal of the shift to profits we saw in the pandemic.
Services are Likely to Lead a Strong Quarter for Consumption
Consumption expenditures will likely grow at more than a 3.0 percent rate and be the dominant factor in the quarter’s growth. The growth in service consumption will outpace goods consumption. The service share remains well below its pre-pandemic level. Air travel stands out as having an exceptionally rapid growth in recent months as does finance.
Consumption of both durable and nondurable goods will be weak and possibly negative. Car sales were weak at the start of the year, holding down growth in durable consumption. A decline in sales of prescription drugs, along with lower gas sales due to higher prices, will depress consumption of nondurables.
Investment Growth to Remain Moderate
Nonresidential Investment grew at a 4.6 percent rate in 2023. Most of this growth was in structures, which grew at a 16.9 percent rate, driven by extraordinary growth in factory construction. The surge in factory construction has slowed this year, so the components will show more moderate growth. Investment in intellectual products grew at just a 3.2 percent rate last year, while equipment investment actually fell slightly. Both are likely to show moderate growth in the quarter.
A factor boosting investment in intellectual products is the ending of the strikes in the motion picture industry. The production of movies and television shows should be largely back to normal in the first quarter.
Residential Construction Continues to Grow
After falling sharply in 2022, residential construction stabilized and grew moderately in the second half of last year. We will likely again see modest growth in the first quarter. High interest rates sharply slowed housing starts in 2022, but because there was such a backlog of homes facing problems due to supply chain issues, the number under construction has changed little. However, the falloff in starts has been much sharper for multifamily units, which will be showing up in reduced supply in the near future. This is a real cost of high interest rates.
Net Exports Will be Modest Drag on Growth
After being a small net positive for growth in the last seven quarters, trade will likely pull the growth rate down a bit in the first quarter. The big factor here is the sharp growth in imports of capital goods and cars. The country continues to have a positive balance in trade on petroleum products.
Saving Rate Likely Understated
We will likely see the personal saving rate come in at close to 4.0 percent for the quarter. This is down not only from the extraordinary peaks hit in the pandemic, but also from the rates of around 6.5 percent that we saw in the three years before the pandemic.
While much has been made of this reported drop in the saving rate it is likely that it is largely due to measurement error. In recent decades, income side GDP has consistently been somewhat higher than GDP measured on the output side, leaving a statistical discrepancy of around -0.5 percent.
In the last two years this has flipped, with the output side of GDP exceeding the GDP measured on the income side by roughly 2.0 percent. While we can’t know at this point which measure is closer to the mark, either way, it would lead to a rise in the saving rate.
If income has been understated, then disposable income would be higher than reported, which would translate dollar for dollar into increased saving. Alternatively, if output has been overstated, this would almost certainly mean that consumption has been overstated, which would also translate dollar for dollar into increased saving. Either way, the true saving rate is likely around 2.0 percentage points higher than the reported rate, which means it is close to the pre-pandemic average.
The First Quarter Will Get 2024 Off to a Good Start
This quarter should look solid from almost every perspective. The biggest potential negative will be bad news on the inflation front. While the fears of inflation being rekindled are likely overblown, there is some evidence for that argument, which this report could contribute to. The biggest positive will be a report that strengthens the case for a stronger productivity growth path. That would also dampen any basis for concerns about inflation.