First Quarter GDP Up, But Fails To Meet Expectations
According to the Commerce Department’s just-released Gross National Product report, economic growth was stronger at the beginning of 2013 than it had been at the end of 2012, but the numbers released did not live up to what analysts had been expecting:
The American economy sped up in the first quarter of this year, with output expanding at an annual pace of 2.5 percent, according to a Commerce Department report released Friday. The number was lower than the 3 percent forecasters had been expecting.
While faster growth of any kind is welcome, much of the acceleration in gross domestic product was probably a result of unusually slow growth at the end of 2012, when the economy grew at an annual pace of just 0.4 percent. Growth in the fourth quarter had been dragged down by reduced restocking of businesses’ inventories, for example, and in the first quarter businesses made up for this by adding much more to their shelves.
Consumer spending was up too, despite fears that the lapse of the temporary payroll tax holiday at the start of the year would hold back how much consumers were willing to spend. It’s unclear whether consumers will continue to spend as freely in the months ahead, once they start to feel the pinch of this effective tax hike, particularly if wages continue to stagnate.
Exports, residential investment (housing, essentially) and business spending on equipment and software also rose.
Economists have expressed concern that the pace of growth may have started out strong in 2013 but slowed by the end of the first quarter, given recent disappointing reports about economic indicators in March. Employment slowed dramatically in March, for example, and orders for durable goods like aircrafts fell more than analysts had expected.
Additionally, across-the-board federal spending cuts, enacted as part of Congress’s so-called sequester, are likely to weigh on growth going forward. In the first quarter of this year, government spending fell at an annual rate of 8.4 percent, after a decrease of 14.8 percent in the fourth quarter of 2012.
From the report:
Real gross domestic product — the output of goods and services produced by labor and property located in the United States — increased at an annual rate of 2.5 percent in the first quarter of 2013 that is, from the fourth quarter to the first quarter), according to the “advance” estimate released by the Bureau of Economic Analysis. In the fourth quarter, real GDP increased 0.4 percent.
The acceleration in real GDP in the first quarter primarily reflected an upturn in private inventory investment, an acceleration in PCE, an upturn in exports, and a smaller decrease in federal government spending that were partly offset by an upturn in imports and a deceleration in nonresidential fixed investment.
Motor vehicle output added 0.24 percentage point to the first-quarter change in real GDP after adding 0.18 percentage point to the fourth-quarter change. Final sales of computers subtracted 0.01 percentage point from the first-quarter change in real GDP after adding 0.10 percentage point to the fourth-quarter change.
The price index for gross domestic purchases, which measures prices paid by U.S. residents, increased 1.1 percent in the first quarter, compared with an increase of 1.6 percent in the fourth. Excluding food and energy prices, the price index for gross domestic purchases increased 1.3 percent in the first quarter, compared with an increase of 1.2 percent in the fourth.
Real personal consumption expenditures increased 3.2 percent in the first quarter, compared with an increase 1.8 percent in the fourth. Durable goods increased 8.1 percent, compared with an increase of 13.6 percent. Nondurable goods increased 1.0 percent, compared with an increase of 0.1 percent. Services increased 3.1 percent, compared with an increase of 0.6 percent.
Real nonresidential fixed investment increased 2.1 percent in the first quarter, compared with an increase of 13.2 percent in the fourth. Nonresidential structures decreased 0.3 percent, in contrast to an increase of 16.7 percent. Equipment and software increased 3.0 percent, compared with an increase of 11.8 percent. Real residential fixed investment increased 12.6 percent, compared with an increase of 17.6 percent.
Real exports of goods and services increased 2.9 percent in the first quarter, in contrast to a decrease of 2.8 percent in the fourth. Real imports of goods and services increased 5.4 percent, in contrast to a decrease of 4.2 percent.
Real federal government consumption expenditures and gross investment decreased 8.4 percent in the first quarter, compared with a decrease of 14.8 percent in the fourth. National defense decreased 11.5 percent, compared with a decrease of 22.1 percent. Nondefense decreased 2.0 percent, in contrast to an increase of 1.7 percent. Real state and local government consumption expenditures and gross investment decreased 1.2 percent, compared with a decrease of 1.5 percent.
Jared Bernstein explains:
Only slightly beneath the surface, the report showed continuing weaknesses in the US economy and, consistent with the unexpectedly weak March jobs report, hints at another softening of demand in recent months. Expectations were for growth above 3% but disposable income, a critical driver of growth in our 70% consumption economy, fell sharply, down 5% in real terms, partly due the loss of the payroll tax break.
The two main factors propelling the economy forward last quarter were firms restocking their shelves (inventory build-up adds to GDP growth) and strong spending by the stalwart American consumer, drawing not on their income but on their savings. Since the inventory component is both highly volatile and less indicative of current demand, it’s useful to look at final demand, essentially GDP without the inventory build-up. This measure grew 1.5% in real terms in the first quarter, down from 1.9% in the last quarter. Again, this less volatile measure tracks demand more closely than the headline number.
Given the slowdown in disposable income, accelerating consumer spending was partly financed by spending out of savings, as the savings rate fell two percentage points, to 2.6%, the lowest savings rate since 2007q4, the quarter in which the recession began. With diminished savings and the fading of stimulus measures like the payroll tax break, future consumer spending will depend more on income growth from jobs and wages, a potentially risky linkage, given recent slowing in the job market.
Housing continues to be a bright spot as residential investment was up almost 13% on an annual basis. Housing has now been a positive contributor to growth for two-years running, adding 0.3% to the 2.5% growth rate for the first quarter.
But the government sector more than offset housing’s contribution, shaving 0.8% off of the growth rate, with across the board declines in defense, non-defense, and state and local public spending. Since 2010q1, the public sector has, on average, taken half-a-percent from real GDP growth per quarter.
As opposed to the annualized quarterly numbers cited thus far, it’s useful to look at year-over-year measures of real GDP growth to get a flavor for the underlying trend in the data. As the figure below reveals, growth by this measure is down a bit over the last six months, with the economy growing slightly below its trend growth rate of around 2%. If this underlying pace of growth persists, it will be very difficult to generate the jobs needed to “legitimately” bring down unemployment rate (meaning through job growth, not through people leaving the labor force).
In other words, what we’re looking at here is a continuation of the same pattern we’ve been locked in virtually sine the recession ended in 2009. The economy is growing, but it isn’t growing at a fast enough pace to create real economic growth. At best, we’re treading water here, not falling into recession (although we came pretty darn close in the final months of 2012), but not exactly doing a spectacular job either. This can best be seen in the monthly unemployment reports, where job growth has been far below even the level needed to absorb the natural growth in population for months now and the Unemployment Rate is falling only because the Labor Force Participation rate continues to fall to historically low levels. Until we’re able to break out of that cycle, we’re going to continue living in the kind of economy we have now where things are, well, okay, but far from good and, for a lot of people, not very good at all.
There are, of course, two revisions coming to these numbers, the first at the end of May and the second at the end of June. It’s possible we’ll see the growth numbers tick up a tenth of a point or two but, given the fact that we’ve seen retail sales and business orders of big ticket goods falling off, it seems just as likely that we’ll actually see downward revisions, and that the second quarter will be less than ideal as well. Like I said, we’re doing okay, but okay isn’t really good enough.