Latest GDP data shows knowledge-related spending continues to grow while economy slows

This morning’s release by BEA of the second estimate of 1Q 2024 GDP confirms that the US economy is slowing down. The second estimate of revised GDP slightly lower to an increase of 1.3% compared to the advanced estimate of 1.6%. Economist had originally expected growth of 2.4%.

In a slight reversal of the advanced estimate, R&D expenditures grew more than originally estimated. Expenditures on software and on information processing equipment were slightly lower the advanced estimate, but still were up compared to the last quarter.

Labor market continues to surprise, and shows vulnerabilities

Once again, this morning’s employment numbers were a bit of a shock, but in the opposite way from last month. After last month’s surge, US payrolls showed an increase in April of only 175,000. Economists had expected non-farm payrolls to rise by 233,000. March was even more of a surge with the data was also revised upwards to 315,000.

The worrisome news is that almost all of the job growth was in two sectors: Intangible Educational & Health Services (employment up by 82,500) and the tangible sector of Trade, Transportation & Utilities (up 52,000). Payrolls in the tangible part of Educational & Health Services also grew by 12,500.

Employment in the important sector of Professional and Business Services declined in April after showing meager growth in March (according to the revised data). It had been a steady source of job growth but recently has been essentially flat (see chart below). Two other sources of job grow were weak. Payrolls in Accommodation and Food Services only grew slightly in April and Arts, Entertainment, and Recreation payrolls dropped. Both has surged in March.

Not good news: Intangibles trade surplus flat and Business Services down

The U.S. trade deficit was essentially flat in March February, according to data released today by the Bureau of Economic Analysis (BEA). The deficit was $69.4 billion, down $0.1 billion from February’s revised level of $69.5 billion. Both exports and imports declined.

The trade surplus in intangible was little changed as both exports and imports grew. The really bad news is that the trade surplus in Business Services continued to drop, having declined steadily since July 2023. The surplus in Financial Services grew modestly in March. It has now increased for 3 months, reversing the trend of shrinking surpluses in this sector that we have seen in the second half of 2023. Charges for the Use of Intellectual Property increased slightly. Insurance Services continues to be a drag on the overall Intangibles surplus.

As I noted last month, the decline in the surplus in Business Services is especially worrisome. Business Services has been a steady contributor to the Intangibles trade surplus. Since COVID, export growth has stagnated, which points to a decline in the competitiveness of the sector. And is bad news for the U.S. economy as a whole.