For the last few months, I’ve been writing periodically to say we’re probably not going to have a recession, and that you shouldn’t read too much into potentially negative signals in stock prices or economic data. I write today to say not to read too much into a positive number. The economy continues to grow, but you shouldn’t necessarily expect that pace of growth to increase.
The positive number we got on Friday was 3.2 percent: The advance estimate of U.S. GDP growth for the first quarter. That’s an improvement from 2.2 percent growth in the fourth quarter of 2018.
But Ernie Tedeschi — one of the macroeconomists I’ve been going to periodically to pour cold water on recession fears — says not to get too excited about this number.
“We see this 3.2 percent GDP print, and that’s a great number, but when you kind of open the hood and look underneath, it looks like something more consistent with 1.5 percent or 2 percent growth,” Tedeschi said.
Why would that be? GDP is made up of several components. Some of them, like inventories and exports, change noisily from quarter to quarter in ways that don’t necessarily correspond to ongoing economic trends. Sometimes that can lead to a GDP number that looks more alarming than it really is; in this case, those non-core elements of GDP happened to perform especially well in the first quarter, leading to a number that could spark unwarranted optimism.
“We certainly don’t want to say this is at all indicative of a slowdown or a recession,” said Tedeschi. “It’s not.” But he noted that growth in the most core aspects of GDP— consumption and fixed investment — actually slowed down a little in the first quarter.
Ongoing growth in the 1.5 percent to 2 percent range is consistent with a hypothesis among macroeconomists: That fiscal stimulus from the 2017 tax bill spurred a temporary spike in economic growth, but that “sugar high” is over and growth will settle back into a less-robust but still-positive pace.
That is far from the worst possible outcome. Unemployment remains low and businesses continue to invest. The economy is likely to remain good enough for the president to brag about it through the 2020 election. But while the economy remains good, the numbers do not suggest it is becoming great.