–Core PCE Prices +1.5% vs +0.4% in Q4; Fedl Spending -7.9%

By Joseph Plocek

WASHINGTON (MNI) – U.S. Q1 real GDP printed +1.8% as final sales
tanked to +0.8%, slowing as analysts expected as inflation jumped and as
Federal spending fell.

The overall deceleration was due to higher imports, slower
consumption (mainly reflecting lower spending on autos and clothing),
and federal spending posting -7.9% as routine budget outlays reverted to
non-emergency levels and defense spending fell further to -11.7%. The
last time government spending fell so radically was Q1:2000.

Spending on structures (both residential and nonresidential) also
declined after gaining in Q4. Growth would have been far worse if
inventories had not contributed nearly a full point to GDP.

The Commerce Department assumed rising inventories and a much worse
March trade balance for missing data. These should be partially
offsetting, but give some leeway for upward revision.

Meanwhile, the average revision to quarterly GDP from the first to
third estimate is 0.6 point without regard to sign. This means it’s very
likely the story that Q1 slowed substantially will not be altered.

Inflation measures were worse. PCE core prices printed +1.5% after
just +0.4% in Q4, and overall GDP prices printed +1.9% after +0.4%.
The latter reflects the effects of rising energy prices, though it is
harder to explain the quick rise in core inflation.

Nominal GDP was up 3.7% SAAR in Q1 after +3.5% in Q4, and the
inflation adjustments lessened the gains. So should the
oil-spike-induced price hike be alleviated, it is very likely growth can
rebound in Q2.

Looking ahead, April data are spotty, but reports are that auto and
clothing sales are holding up. The soon-to-be-released monthly sales
reports will go a long way to refining Q2 forecasts.

Annual revisions for GDP are scheduled for release July 29. Some
components, including consumption and private investment, will be
altered back to Q1:2003, well beyond the usual three-year revision time
frame.

GDP Components: Q2 Q3 Q4 final Q1 Prelim
Real growth +1.7% +2.6% +3.1% +1.8%
Real final sales +0.9 +0.9 +6.7 +0.8
PCE +2.2 +2.4 +4.0 +2.7
Nonres fixed invest +17.2 +10.0 +7.7 +1.8
Res fixed invest +25.7 -27.3 +3.3 -4.1
Net Exports Contrib cut 3.50 cut 1.70 add 3.27 cut 0.08
Inventory Contrib add 0.82 add 1.61 cut 3.42 add 0.93

**Market News International Washington Bureau: (202)371-2121**

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