First Quarter GDP Is No Reason to Cheer

The Commerce Department reported that inflation-adjusted economic growth in the U.S. remained in positive territory during the first quarter, but just barely.

Real gross domestic product rose at a seasonally adjusted annualized rate of 0.6 percent from January through March in the "advance" estimate of economic growth, the first of three readings for the quarter. The "preliminary" estimate will be released at the end of May and the "final" reading will come at the end of June.

Consumer spending posted its lowest quarterly contribution in almost seven years. As shown circled below at just 0.68 percentage points, personal consumption expenditures have not been this low since the second quarter of 2001 and, prior to that, you have to go back to 1991 to find a worse reading.

Net exports declined but were still positive contributing 0.22 percentage points, down from much higher levels over the last year. This is likely due to the higher cost of imported oil in recent months that have eaten away at export gains.

The single most important reason for the positive overall number was the contribution of 0.81 percentage points from rising inventories, likely an unintended buildup consistent with the consumer spending slowdown.

Of course, price inflation came in at an annualized rate of just 3.5 percent for the quarter, down slightly from the 3.9 percent reading during the previous quarter - understated inflation probably had more to do with keeping the overall GDP number positive than anything else.

Residential fixed investment continued to be a drag on the economy and it has now been joined by a decline in commercial building. As shown circled below, nonresidential investment contracted for the first time in over two years and posted its sharpest decline since 2002.

The bursting of the housing bubble continues to be a major problem for the economy as residential fixed investment dropped 26.7 percent, subtracting a full 1.23 percentage points from overall GDP growth.

Didn't analysts look at this decline last year and say that the worst was over? In 2006, residential fixed investment posted quarterly declines of -.7, -11.7, -20.4, and -17.2 percent. Then in 2007, it was -16.3, -11.8, -20.5, and -25.2 percent.

Now, the first quarter resulted in a decline of 26.7 percent - the worst quarter since 1981.

How anyone could point to the positive overall number and cheer is beyond me. The first quarter was a period of recession in everything but name.

[Note: If you haven't already read Kevin Phillips' article Numbers Racket (.pdf) in Harpers, you really should. It goes a long way in explaining why the current GDP report is not what it appears.]