According to today’s report from the Bureau of Economic Analysis, gross domestic product—the broadest measure of economic activity—grew by an annualized rate of 1.8% in the first quarter of 2011, a decline from the previous quarter’s 3.1% rate. The last six months have seen an average growth rate of just over 2.4%, a rate indicating that the economy’s growth isn’t strong enough to put any downward pressure on the overall unemployment rate. In short, unless the economy starts growing appreciably faster, the problem of high unemployment will be quite persistent.
Most of the measures that comprise the overall GDP rate do not suggest that job growth is imminent. Final demand—a measure of output growth that strips out the influence of inventory investment (a particularly volatile component of GDP and one whose movements are quite hard to interpret quarter-to-quarter)—rose even more slowly than overall GDP, growing at only a 0.8% annualized rate in the first quarter, the slowest since the third quarter of 2009 (the first following the official end of the Great Recession). Domestic demand growth—a measure of final demand stemming from U.S. residents—also rose very slowly, growing at a 0.9% annualized rate, the lowest rate since the fourth quarter of 2009.
Growth in personal consumption expenditures—the single largest component of GDP—decelerated to a 2.7% annualized rate from the previous quarter’s 4.0% rate.
Business investment in equipment and software continued its strong growth, rising by 11.6% in the quarter. This type of investment has been growing consistently since the recession ended, averaging 12.4% annualized growth since the second quarter of 2009.
However, business investment in structures fell by 21.7% in the quarter, its 10th decline in the last 11 quarters (the only uptick had been the previous quarter) and the largest single-quarter fall since the end of 2009. Residential investment also fell after rising the previous quarter, declining at a 4.1% annualized rate compared to a 3.3% increase in the previous quarter. It seems clear that the overbuilding associated with price-bubbles in both residential and commercial real estate have yet to be resolved and that these sectors will not be reliable growth-engines for still quite some time.
Accelerating inventory accumulation added 0.93 percentage points to the overall growth rate; this bounce back was largely expected after a very large slowdown in inventory accumulation had subtracted 3.4 percentage points off of growth in the previous quarter.
Net exports contributed a slight drag on growth in the first quarter, knocking 0.08 percentage points off of GDP growth. This follows the previous quarter that saw a large positive contribution to growth from trade flows. While it is good news that the trade reversal was not even larger, it also seems clear that this sector should not be relied upon to generate consistent growth in the near future, absent very large changes in policy (e.g., a large decline in the value of the dollar).
Federal government spending subtracted 0.68 percentage points off of the growth rate in the first quarter, all of which (and a bit more) was accounted for by a decline in defense spending while non-defense spending remained essentially flat. State and local government spending cutbacks subtracted 0.41 percentage points off of the quarter’s growth rate, the 5th decline in this sector in the last seven quarters, and the largest since the first quarter of 2010. Given the looming fiscal crisis facing the states and the re-orientation of political debate at the federal level toward rapid fiscal consolidation, it is unlikely that these sectors will spur much growth in the near-term either.
The personal savings rate ticked up slightly to 5.7%, up from 5.6% in the previous quarter. This level is in line with the annual average rates for both 2009 and 2010. In short, this seems to be roughly the level at which American households seem content to save in a post-housing-bubble economy. While this savings rate was significantly lower during the bubble, historically this rate has reached much higher levels than 6% for extended periods. In short, savings rates do not seem poised to return to bubble-era lows, and history suggests they may even rise in coming years. Given this, sustaining consumption growth going forward will depend to a large degree on robust growth in wage and salary incomes. However, aggregate inflation-adjusted wage and salary income (deflated by the personal consumption expenditures price index) saw slightly negative growth in the first quarter.
All of the signs in this report point to an economy that remains below potential because it lacks sufficient spending. Another clear sign that the economy is running below potential is the continuing slow growth of core prices—prices minus food and energy products—whose changes are both volatile and driven largely by supply-side influences in the short-run. The “market-based” deflator for core personal consumption expenditures (a closely watched indicator of inflationary pressures building up in the economy) rose by less than 1% between the first quarters of 2010 and 2011. Given this data on slow spending growth and decelerating wage pressures, it is odd indeed that boosting economic growth is not a higher priority among Washington policymakers.
