Make Up of Q1 GDP Was 'Bizarre'

Excerpt from Raymond James Economist Dr. Scott Brown's latest economic commentary:

By historical standards, the composition of 1Q09 GDP growth was bizarre. Consumer spending rose (not a surprise, but more than anticipated), while business fixed investment (structures, equipment and software) and residential fixed investment (homebuilding) tanked. A faster reduction in inventories accounted for nearly half of the decline in overall GDP. Exports plunged, subtracting a lot from GDP. However, imports also sank sharply adding back even more (note that falling imports are a sign of weakness, but imports have a negative sign in the GDP calculation). Government spending and investment also contracted – this was mostly in defense (which tends to be choppy) and state & local government (a consequence of severe revenue shortfalls).

Click here to enlarge

Consumer spending accounts for about 70% of overall GDP. Hence, at first glance, the first quarter results are encouraging. However, spending was supported by three special factors in 1Q09.

1) The annual adjustment in Social Security (based on y/y CPI inflation for 3Q08) was a relatively large 5.8% and government wage increases reflected last year’s higher inflation. Private-sector wages and salaries fell at a 6.5% annual rate in 1Q09, but personal income fell only 2.0% thanks to gains in other income sources.

2) Personal tax payments have fallen (down 15.5% relative to 1Q08). The economy’s automatic stabilizers are working. That is, personal taxes fall in a recession, which limits the impact of weaker income growth. Disposable income rose at a 5.1% annual rate in 1Q09. Note that the fiscal stimulus plan had only a minor impact in the quarter. However, tax cuts are a part of the stimulus plan – withholding has gone down in April (leaving workers with more to spend).

3) Gasoline prices are lower. The PCE Price Index fell at a 1.0% annual rate in 1Q09, following a -4.9% pace in 4Q08. Spending less to fill up their tanks, consumers had more money to spend on other things.

Comments

[rber:]

It has been apparent for months now that the US Gov Media Machine (running right along side the printing presses) will stop at nothing to prop up the bloated, rotting stench that is the is the US financial system. What did Nixon say way back when. Something about breaking the law...if the president does it, breaking the law is not breaking the law. These twisted morons (the government) will lie, cheat, swindle, boondogle and commit inexhaustable fraud to meet their goals. You've gotta be impressed with their resolve if nothing else!

May 05 05:32 PM

[conceptwizard:]

Anyone that can orcestrate an award winning eletction with the whole country watching in tears. Yellin "YES WE CAN".Should have no problem making people think that the economy is recovering. I mean when you control the media, the congress and are in bed with GoldmanSacs. What isn't possble?

May 05 07:18 PM