First Quarter GDP: A Look Inside the Numbers

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Includes: AGG, DIA, SPY
by: Daryl Montgomery

The advance report for first quarter GDP came out today and it indicated that the U.S. economy expanded by 3.2%. Approximately half of that was due to increases in business inventories. Business equipment and software investment supposedly went up over 13% and was the biggest sub-category gainer. Consumer expenditures somehow went up 3.6%, even though real disposable income was flat. Increases in federal government spending helped raise the numbers.

While the biggest contribution to the report was in the inventory category, this represented a lower percent than in the fourth quarter of 2009. Inventories added 3.8% of the 5.6% increase in GDP last quarter, or two-thirds of the total. Inventories didn't actually increase in the fourth quarter either; they dropped by $19.7 billion. Thanks to the peculiarities of GDP math, the slower rate of decline led to a big increase in GDP. Mainstream media then reported this turn of events as the U.S. economy being on fire (if they meant it was burning down, they may have been correct). In Q1, inventories actually increased, though by $31.1 billion. This is certainly more positive, but inventory restocking by itself doesn't indicate a recovering economy. It does however lead to a recovery in the GDP number.

The increase in business equipment and software of 13.4% in Q1 was less than the also very high 19.0% last quarter. Overall this led to nonresidential fixed investment increasing 4.1% in the current quarter even though investments in nonresidential structures (commercial buildings) declined 14.0%. Still, that was better than the 18.0% drop in Q4 of last year. Real residential fixed investment (housing) decreased 10.9% this quarter, in contrast to a supposed increase of 3.8% in the fourth quarter of 2009. Real estate, which was the epicenter of the Credit Crisis and the damage to the economy, is obviously still troubled. How can there be recovery under such circumstances?

When reporting on first quarter GDP, big media highlighted the consumer spending numbers. The 3.6% current number was much higher than the 1.6% number at the end of last year. Durable goods sales supposedly increased 11.3% in Q1 compared to just 0.4% in Q4 2009. Motor vehicles created a 0.52% growth in GDP by themselves. Nondurable goods were up 3.9% compared to 4.0% last quarter, so almost all of the big change took place in durable goods. U.S. consumers managed to increase their spending on these high-ticket items even though real disposable income didn't go up. Consumer credit was also declining in the first quarter. Revolving credit (credit cards) fell at a 13% annual rate in February. So somehow consumers are now spending more money even though they don't have the funds available from their income or credit. That certainly is interesting.

Finally, government spending, which has been the mainstay of the economy for the last two years, increased by 1.4% in the first quarter compared to no change in the last quarter of 2009. Nondefense spending increased 1.7 percent in the beginning of 2010 and this compares to a jump of 8.3% at the end of last year. State and local spending were down in both quarters. At this point it will be hard for the federal government to increase its spending from current levels, so decreases are likely in the future and this will be a drag on GDP going forward. What part of the economy will pick up the slack? Well, I guess that depends on what numbers the statisticians find easiest to manipulate.

Disclosure: None relevant.