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US: GDP Growth in 1Q08

Mon, Apr 28 2008, 15:46 GMT
by Marcial Nava

BBVA Bancomer

• • Q108 GDP growth could surprise to the upside, mostly due to inventory accumulation and solid net exports
• • However, private consumption is likely to expand at its slowest pace since 1991, while NRI will continue to decelerate
• • We maintain our scenario of sluggish economic growth in 1H08 and a slow recovery thereafter

We expect GDP growth in 1Q08 to be 1% on a quarterly annualized basis – stronger than in 4Q07 and higher than average consensus. Our forecast primarily reflects a rebound in inventory accumulation –after a decline in 4Q07- which could have added around 0.5pp. In addition, contribution from net exports remained strong while nonresidential investment likely moderated; although, it continued expanding above overall GDP. In contrast, the drag from residential investment continued -1pp on average during the last six quarterswhile private consumption probably decelerated substantially.

In spite of our elevated forecast, PCE and nonresidential investment continued to soften. In fact, the pace of expansion of personal consumption will be the lowest since the last quarter of 1991 and could decline in 2Q08 if real personal income continues weakening. This scenario is most likely given ongoing losses in employment, elevated energy and food prices, and softer wage gains. In addition, declining house prices and weaker financial conditions erode household net worth.

Meanwhile, nonresidential investment could moderate further if firms continued scaling back production in light of expected weaker sales and tighter credit conditions. While profits are still high they are contracting on a year-over-year basis, which in tandem with worsening expectations, could forestall capital spending plans and job creation even further.

Given that inventory levels of houses for sale remain quite high, home prices could still decline another 10 to 15% on average. Thus, the drag of the housing meltdown will persist for several more quarters and downside risks remain. However, while we cannot discard a deeper contagion, the spill over effects on the rest of the economy have not been compatible with a severe recession. In any case the economy remains highly resilient and supported by solid fundamentals (See our Weekly Analysis Jan 14th 2008).

GDP growth will decelerate further

In 2Q08 we expect a sharp inventory correction and a contraction in GDP. In 2H08, activity will start to recover albeit at a slow pace. Thus, we maintain our forecast of 1% GDP growth for 2008 with elevated downside risks. Lower wage gains and increased inflationary pressures could dampen disposable income growth, which together with weak labor markets, could result in a sharp correction in private spending. In addition, tighter credit conditions and weaker sales could drive firms to scale back production and reduce capital spending more than assumed in our base scenario.

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Published on  Tue, Apr 29 2008, 06:46 GMT

Archive

• GDP Growth in 2Q08: revision of forecasts
  Published On Fri, Aug 1 2008, 15:57 GMT
• GDP growth in 2Q08
  Published On Fri, Jul 25 2008, 07:24 GMT
• US: GDP Growth in 1Q08
  Published On Fri, May 2 2008, 09:03 GMT
• US: GDP Growth in 1Q08
  Published On Mon, Apr 28 2008, 15:46 GMT
• GDP growth in 4Q07
  Published On Thu, Jan 31 2008, 08:16 GMT

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BBVA Bancomer  | Av. Universidad 1200 Col. Xoco México 03339 D.F.
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