There were two important reports on the U.S. economy released this morning. First, gross domestic product (GDP) growth cooled in the first quarter of 2018, according to new data from the Bureau of Economic Analysis (BEA). Specifically, real GDP, which measures the value of the production of goods and services in America adjusted for price changes (inflation), increased at an annual rate of 2.3 percent in Q1. That is down from Q4's 2.9 percent pace of expansion but much better than the 2.0 percent gain economists anticipated and well above the average Q1-gain seen during the past decade. The quarter-over-quarter slowdown in GDP growth was largely driven by softer consumer spending, not surprising following 2017’s above-trend spike in holiday shopping. More importantly, much of that weakness was offset by a large gain in business investment, likely a side effect of the recently passed tax cuts which could continue to support both business and consumer spending in the rest of 2018. Altogether, this was another good but not great GDP report, especially given how late it is in the current economic cycle. It is worth remembering, though, that this is only the first estimate of Q1 GDP growth, meaning that significant revisions are possible over the next few months.
Elsewhere, a report from the Bureau of Labor Statistics (BLS) showed that total employment costs (employer-paid taxes such as Social Security and Medicare in addition to the costs of wages and benefits) in America grew at an elevated rate in the first quarter of 2018. Specifically, total compensation costs for civilian workers lifted by 0.8 percent in Q1, including a 0.9 percent gain in wages and salaries and a 0.7 percent rise in benefits. As a result, total compensation on a year-over-year basis lifted by 2.7 percent in Q1, the fastest pace of annual growth recorded since 2008. These accelerating wage gains are a reflection of the tightening labor market as employers increasingly compete for qualified workers. Further, higher employment costs will put additional strain on margins and in turn help overall inflation in America inch closer to the Federal Reserve’s target.
Sources: Econoday, U.S. DoC, U.S. DoL, Bloomberg, FRBSLPost author: Charles Couch