What should we make of what looks to be a stunning deceleration in US first quarter GDP? The market has clearly taken note, wiping out a good deal of its expectations for Fed rate hikes over the balance of 2017. And a lot of ink will be spilled in the week ahead as economists slice and dice the components that contributed to its softness. But the right interpretation might simply be that Q1 was no more meaningful as a sign of where the trend lies than what a cool month might say about global warming.
That’s because, like the weather, GDP reports are variable. Even if we leave out the heightened volatility associated with recessions, in the past two expansions, US quarterly growth has averaged 2.4%, with a standard deviation of 1.6%. Assuming these are normally distributed, that means that roughly a third of the time, a single quarter will be more than 1.6% above or below the mean.