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The Lens: US GDP beats expectations in Q1, but it’s weaker than it looks

Ryan Connelly, May 10, 2019

The North America outlook remains stable on the back of strong US performance. Employment growth and wage growth are improving in both the US and Canada. Amid falling inflation, this is a strong market for consumer spending, and firms should continue to implement premiumization strategies. In the US, fears of a 2019 recession were always overblown. However, these fears have been firmly dispelled by the emergence of strong positive trends in new home and retail sales. In Canada, weaker oil prices and the implementation of production caps in Alberta have weakened the growth and investment outlooks. We still expect a gradual recovery across 2019.

DuckerFrontier recently launched The Lens, a weekly newsletter published by our Global Economics and Scenarios team to highlight developments and trends that will have the highest impact on business executives. Below is an excerpt from this week’s edition, “US GDP beats expectations in Q1, but it’s weaker than it looks.”

Key details
  • US Q1 GDP came in at 3.2% YOY growth, far higher than consensus expectations of 2.3%.
  • However, most of the upside surprise came from a decline in imports (which increases GDP) and a build in inventories. Consumer spending and fixed investment actually slowed a bit.
  • Weaker manufacturing purchasing manager index (PMI) data in recent months indicates that US firms are scaling back production. The inventory overhang is the result of consumer demand growing slower than expected
  • Trump, emboldened by the beat on US Q1 GDP, stronger-than-expected employment data, and an extended stock market rally, has decided to take a hard line in US-China trade talks (see above).

Our view

DuckerFrontier has long believed that US growth in 2019 would be relatively strong, with an upside bias to our 2.1% annual forecast. This makes the US unique amongst major economies, like Germany or China, where economic forecasts have continually been downgraded. The main risk to the US outlook comes from policy-induced contraction, like a further escalation to the US-China trade war that leads to an erosion of business and consumer confidence.

Business implications

Inventory builds and slowing consumer spending means that firms servicing US customers need to carefully manage production schedules and adjust demand targets and pricing strategies. There is already some evidence that large inventories are leading to price discounting. But there remains opportunity. Although US consumer spending is slowing, it will remain solidly positive in real and nominal terms. Consumer confidence is high and customers in most segments are willing to pay up for premium products and additional service offerings.

FrontierView clients: See our recent North America Monthly Market Monitor for further insights

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