April 25, 2003
Recovery limps along with continued weak growth
The economy shows few signs of a robust recovery, as inflation-adjusted gross domestic product (GDP) rose only 1.6% in the first quarter of 2003, according to today’s report from the Bureau of Economic Analysis. This small growth follows an even smaller 1.4% increase in the last quarter of 2002. Growth in the first quarter of 2003 was driven largely by a decline in foreign imports and increases in personal consumption spending, residential investment, and total government spending. Dampening growth were declines in durable goods orders, business investment, exports, and state and local government expenditures. Price inflation, measured by the GDP deflator, climbed to 2.5%, up from 1.8% in the last quarter of 2002.
The single largest contributor to growth in the first quarter of 2003 was a decline in foreign imports, which fell 7.9% last quarter after increasing 7.4% in the fourth quarter of 2002. The falling imports helped narrow the trade deficit in real terms from the record level of the previous quarter, as it fell from $532.2 billion to $508.2 billion, which is still higher than any level of growth before the end of 2002. In addition, falling foreign imports were accompanied by a 3.2% decline in exports. While there has been much talk in the business press lately about the decline in the dollar, it seems unlikely that this is driving these trends in trade. While the dollar has declined substantially against the Euro, the most appropriate measure of exchange rates (the real, broad index compiled by the Federal Reserve) remains within 5% of its February 2002 peak. Until there is evidence that something fundamental (such as significant exchange rate changes) is driving the import decline, it would be unwise to expect this to bolster GDP growth in the coming year.
The falling imports were likely the result of continued weak growth in overall consumption spending, which rose only 1.4% last quarter. This is the smallest increase in consumption spending since the first quarter of the recession of 2001. Furthermore, spending on durable goods registered a second straight decline, falling by 1.1%, following an 8.2% decline in the fourth quarter of 2002. This may indicate that the surge in durable goods spending that kept the economy afloat over the past year was not sustainable; essentially, firms offering low-cost financing for durable goods orders (like automobiles) poached demand growth from the future by inducing consumers to move up these expenditures. The past two quarters point to softening consumption growth, driven largely by weak labor market conditions.
Residential investment remained strong, as spending on new homes, construction, and renovation increased 12%, following a 9.4% increase in the last quarter of 2002.
Probably the most worrisome data in today’s report concern business (nonresidential) investment, with declines recorded in structures, equipment and software, and inventory investment. Equipment and software investment fell the farthest, declining 4.4%. This decline follows a 6.2% increase in the last quarter of 2002, which spurred what now appear to be premature hopes of an investment rebound. Investment spending on structures fell 4.2%, marking the sixth consecutive quarter of decline.
Another troubling sign is the negative contribution of state and local government spending to GDP growth. State and local expenditures declined by 0.1% in real terms, suggesting that the predicted crunch from state fiscal crises is hurting economic growth. Furthermore, state and local government expenditures registered the smallest year-on-year advance (0.4%) since the first quarter of 1993.
This level of overall growth is nowhere near high enough to spur job creation. Productivity growth (how much GDP each worker can produce) has increased by an average of more than 2.5% over the past two years, implying that GDP needs to grow at least this fast just to keep employment from shrinking. The anemic growth of this last quarter will likely result in poor labor market conditions in the near future.
—by Josh Bivens
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