San José, CA – On Friday, April 26, the Bureau of Economic Analysis (BEA) issued its first report on economic growth in 2019. The country’s Gross Domestic Product, or GDP, which measures the total production of goods and services, grew at a 3.2% annual rate during the first three months of the year (January to March). This was stronger than most economists expected.

But much of the growth was made up of one-time events, and inside the report there were continuing signs of economic weakness. The biggest contributor to growth was a large drop in imports. During the second half of 2018 many companies pushed forward their imports out of a fear of an escalating trade war with China. But with Trump calling off his original pledge to raise tariffs on Chinese goods even more and ongoing trade talks continuing, these companies cut back on imports. This drop in imports boosted the GDP report as imports are subtracted from the final number and is unlikely to continue in the future.

The second biggest factor was a large jump in spending by state and local governments on capital projects such as buildings, roads and bridges. This increase is unlikely to be sustained as these projects take a long time to complete and there would have to be an ever-increasing number of projects started to keep this rising. So this was probably another one-time factor.

The third biggest factor was a large jump in inventories. As GDP counts production, if goods are made but sit unsold on store shelves, it counts as economic growth. This is a potential sign of economic weakness if consumers are not buying all of what businesses produce, and could lead to production and job cuts in the future.

Not counting the impact of changes in trade, government spending, and inventories, total private sales grew at a 1.3% rate, only half that of the last three months of 2018. Based on this, most economists expect economic growth to slow for the rest of the year.

Trump and the Republicans in Congress claimed that their 2017 corporate tax cut would lead businesses to increase spending on new plant and equipment, creating more jobs. Business investment did increase at a strong rate in the first six months of 2018, but since then it has slowed. This part of GDP grew at only half the rate of previous quarter (October to December of 2018), a sign of a slowdown.

Another sign of economic weakness was the continuing fall in the construction of new homes, apartment buildings and other residences. This part of GDP has fallen for five quarters back-to-back, and together with business investment, dragged down ‘fixed investment’ to less than two-tenths of one percent, barely above zero. Weakness in business investment or housing construction is what can pull the economy into a recession if their fall is big enough and lasts long enough to pull the rest of the economy down with them.

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