US Q1 GDP Rebounds, But Falls Short Of Forecasts

US economic growth rebounded in the first quarter after stalling in last year’s final three months, the Bureau of Economic Analysis reports in today's initial GDP estimate. But while Q1’s 2.5% advance (real seasonally adjusted annual rate) is a substantial improvement over last year’s slim 0.4% rise in Q4, today’s number is still well below expectations. The leading headwind in Q1: another hefty drop in the federal government's spending on defense. By contrast, consumer spending rose the most in two years in the first quarter, although that still wasn't enough to boost growth to match expectations. The Capital Spectator’s average econometric nowcast, for instance, anticipated a 3.2% rise in today’s GDP release.

Nonetheless, the return to growth in the first quarter is certainly welcome, even if it's not a surprise. Monthly economic data has been trending positive so far this year, particularly in January and February. Indeed, today's GDP report shows that personal consumption expenditures, which account for roughly 70% of economic activity, revived in Q1 with a 3.2% increase vs. 1.8% in 2012:Q4.

The key takeaway is that the US economy continued to post modest growth in the first quarter. The concern is that the momentum is slowing, or so several key indicators in March imply--the growth rate in nonfarm payrolls slowed sharply last month, for instance. For now, April data remains mostly guesswork. One of the early clues for this month is the flash estimate of the PMI Manufacturing Index, which slipped to 52.0 vs. 54.6 in March, reflecting the "weakest manufacturing expansion since last October," notes Markit Economics, which publishes the data.

Is the slower rate of manufacturing growth a sign of things to come for April generally? Next week will offer some answers with updates on monthly payrolls from ADP (May 1) and the Labor Department (May 3). We'll also learn how the ISM Manufacturing Index (May 1) compares with the PMI data for this month.

Some analysts are already managing expectations down. “We saw some good resilience from the consumer, particularly given all the headwinds,” Michael Feroli, chief U.S. economist at JPMorgan Chase, tells Bloomberg. “The weakness in government spending is an issue. It’s going to be tough to repeat the first-quarter performance this quarter.”

Avery Shenfeld, chief economist at CIBC World Markets Economics, agrees. "It wasn't the bang-up start to the year we had hoped for, and the signals from March suggested that we will only decelerate from here into the spring trimester."