April 27, 2007

GDP growth continues deceleration

by EPI economist L. Josh Bivens

The Bureau of Economic Analysis (BEA) reported today that gross domestic product (GDP) grew only 1.3% in the first quarter of 2007, down from 2.5% growth in the last quarter of 2006, and the slowest growth rate since the first quarter of 2003.

The slowdown was led by an ongoing fall in residential investment (down 17%) and an increase in the trade deficit (which knocked 0.52% off of the final GDP growth number).

The “market-based” price index for personal consumption expenditures minus food and energy rose by 2.2%, up from 1.6% in the previous quarter.

There was very little encouraging news in this report. Equipment and software investment rose slightly after a large fall in the previous quarter, but still was quite weak relative to historical averages. Consumption growth was relatively strong compared to other components of GDP, but ticked down relative to last quarter.

Balanced against these glimmers of good news was a continuing negative savings rate for the quarter (-1%). This negative savings rate is especially noteworthy given that this quarter’s income numbers include $50 billion in year-end bonus payments. Even this substantial transitory boost to income could not help income growth keep up with consumption growth.

Some of the growth slowdown in the first quarter was the result of a fall in inventory investment, but the final sales figures (which strip inventory changes out) rose only 1.6% for the quarter, well below the 3.7% growth of the previous quarter.

As the Figure below shows, this latest report provides further evidence that economic growth is slowing. It should be noted that much of the damage commonly associated with recessions (rising unemployment, falling earnings, etc.) also results simply from an economy that is growing well below its trend potential. Unless there is a rapid turnaround in the U.S. economy, below-trend growth in the future seems to be a real danger.

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The Economic Policy Institute GDP PICTURE is published quarterly upon release of the Bureau of Economic Analysis’ quarterly GDP report.

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