Productivity growth will be close to 2.4 percent for the quarter.The first increase in inventories since the first quarter of 2008 raised GDP growth in the first quarter of 2010 to 3.2 percent. The 33.1 billion annual rate of accumulation added 1.6 percentage points to growth. Final demand in the first quarter grew at a 1.6 percent annual rate, almost the exact same rate as for the prior two quarters. Consumption grew at a 3.6 percent annual rate, adding 2.55 percentage points to GDP growth. Car purchases were a big part of this story, adding 0.79 percentage points to growth for the quarter. Consumption of non-durable goods and services grew at 3.9 percent and 2.4 percent annual rates, respectively. This rise in consumption was associated with a decline in the savings rate from 3.9 to 3.1 percent. While many analysts have portrayed consumers as being pessimistic, this is an extremely low savings rate by historical standards. With house prices resuming their decline, more homeowners are likely to recognize the loss of wealth associated with the collapse of the housing bubble. As a result, it is more likely that the savings rate will go higher than lower. Construction of non-residential structures fell at a 14.0 percent annual rate, continuing a decline that began in the third quarter of 2008. It is likely that output in this sector will decline further, at least through 2010, given the enormous overbuilding in the sector. Investment in equipment and software grew at a respectable 13.4 percent annual rate, which was down somewhat from the 19.0 percent rate in the fourth quarter. Spending on software added 0.36 percentage points to GDP growth for the quarter. Non-residential investment as a whole added 0.38 percentage points to GDP growth. Housing construction dropped at a 10.9 percent rate, following two consecutive quarters of growth, subtracting 0.29 percentage points from GDP. Given the current slow pace of construction, it is likely that there will be some uptick in housing, although probably not enough to have a substantial impact on growth. Trade is again turning into a big subtraction from growth as the growth in imports far exceeds the growth in exports. Exports grew at 5.8 percent annual rate, adding 0.66 percentage points to growth, while imports grew at an 8.9 percent rate, subtracting 1.28 percentage points from growth, leaving a net effect of trade of –0.61 percentage points. Greece’s troubles have produced a flight to the dollar, raising its value against the euro and other currencies. This is likely to contribute to further increases in the trade deficit through the rest of 2010. The state and local budget crises are leading to sharp cutbacks in spending. The state and local sector contracted at a 3.8 percent annual rate, subtracting 0.48 percentage points from growth in the quarter. Most of the cutbacks were in investment spending, which fell at a 14.7 percent annual rate. Governments apparently are opting to deal with their budget squeezes by putting off capital expenditures in order to continue to provide current services. This may be the best option at present, but in the long-term this pattern of cutbacks will slow the growth of productivity. Federal spending grew at a 1.4 percent rate, but the government sector as a whole subtracted 0.37 percentage points from growth in the quarter. There is little reason to expect that final demand will pick up substantially from its current rate of growth. The savings rate is unlikely to decline further, which means that consumption growth will be weak, and non-residential construction, state and local government spending and foreign trade are all likely to be substantial drags on growth. If the rate of inventory growth stabilizes, then this would imply GDP growth of close to 2.0 percent, which is not enough to generate jobs.The “positive” side of this report is that analysts who feared that rapid productivity growth was preventing job growth now have less to worry about. Output in the non-farm sector grew at a 4.4 percent annual rate. With hours having risen at close to a 2.0 percent rate, this implies a modest 2.4 percent rate of productivity growth for the quarter. The prior uptick in productivity was typical for the end of a recession and now it appears that growth has returned to normal levels.
I have been worried since November of last year about the economy moving sideways, and more specifically about stagnating employment since February. Yesterday’s release of initial claims for unemployment, which saw average claims increasing slightly, did nothing to change that assessment:
In the week ending April 24, the advance figure for seasonally adjusted initial claims was 448,000, a decrease of 11,000 from the previous week’s revised figure of 459,000. The 4-week moving average was 462,500, an increase of 1,500 from the previous week’s revised average of 461,000.
Initial claims have been moving sideways for four months, and are above the approximately 400,000 level many people believe represents the point at which jobs are being created rather than lost. Here’s a graph of the series:
The Red line is actual claims. The Black line is the four week average.Here’s a graph since 2007 that makes the recent sideways movement in claims more apparent:
The Red line is actual claims. The Black line is the four week average.Turning to other economic news, the Bureau of Economic Analysis released its advanced estimate of GDP growth for the 1st quarter this morning, and GDP growth was estimated to be 3.2 percent:
Real gross domestic product — the output of goods and services produced by labor and property located in the United States — increased at an annual rate of 3.2 percent in the first quarter of 2010, (that is, from the fourth quarter to the first quarter), according to the “advance” estimate released by the Bureau of Economic Analysis.
While some are reading this as encouraging news, and positive growth is certainly better than the alternative, a growth rate of 3.2% is not enough to make up for lost ground. That is, the economy is currently operating at below its potential level. A growth rate of 3.2% will keep things from getting worse — the distance between the actual level of output and its potential level will not increase — but the distance will not decrease either.(Potential output also grows at around 3 percent per year, the potential and actual output lines are moving parallel, but what we want is for the distance between the two lines to decrease.)
A 3.2 percent growth rate is not large enough to make up for the lost GDP during the recession. In past recoveries, GDP growth rates of 7% or more for several quarters were not unusual, but so far we are not seeing growth rates at that level. Until we do, the economy — employment in particular — is likely to continue its sideways movement.
[On the GDP figures, see also: Calculated Risk (here too).]
The change in private inventories was smaller this quarter - adding 1.7% to GDP in Q1 2010 compared to 4.4% in Q4 2009. It is important to note that the inventory contribution to Q4 GDP was from a slowdown in the liquidation of inventories, but in Q1 businesses were building inventories - and this inventory build will probably slow in Q2. As I noted earlier, the two leading sectors, residential investment (RI) and personal consumption expenditures (PCE), were mixed. RI declined to a new record low as percent of GDP, however PCE increased at a 3.6% real annualized rate. The increase in PCE does not seem sustainable unless employment and incomes increase soon. A large portion of the increase in PCE came from a decrease in personal saving.Click on graph for larger image in new window. This graph shows personal saving as a percent of disposable personal income.It is not unusual for the saving rate to decline at the beginning of a recovery as people become more confident. This helps drive consumer spending, but with the high levels of household debt, I expect the saving rate to increase over the rest of the year. Here are some Q1 numbers (all annualized):
Personal consumption expenditures (PCE) increased $130.7 billion Personal saving declined $88.5 billion. Government social benefits to persons increased $61.1 billion.So the boost in PCE came from the decline in saving and the increase in benefits. That is not sustainable. The second graph shows real personal income less transfer payments as a percent of the previous peak. Unlike the recovery in GDP, real personal income less transfer payments has barely increased and is still 6.6% below the pre-recession level.The peak of the stimulus spending is in Q2 2010 (right now), and then the stimulus spending starts to taper off in the 2nd half of 2010. So underlying demand better increase soon - and that means jobs and incomes going forward. Unfortunately residential investment is usually one of the key engines for employment and growth at the beginning of a recovery - and I expect RI to be sluggish all year because of the huge overhang of existing housing units. So my guess is the recovery will probably remain sluggish, and I still expect a slowdown in the 2nd half of 2010.
The recession is over.That's the big take-away from today's report from the Bureau of Economic Analysis that the seasonally adjusted real value of the nation's production of goods and services grew at a 3.2% annual rate during the first quarter of 2010. But the details behind today's report suggest that the recovery so far remains pretty weak by historical standards....Nevertheless, the details behind the 3.2% growth for 2010:Q1 are disappointing. Half of the growth came from the fact that firms were no longer drawing down inventories and have started to rebuild them slightly; real sales of final goods and services only increased at a 1.6% rate during the quarter, which would be an anemic rate in normal times and is particularly disappointing at this point in a recovery. And even 3.2% growth in GDP may not be enough to make progress in bringing the unemployment rate down....Spending declines by state and local governments subtracted half a percent from the GDP annual growth rate, and residential housing another third of a percent. Nonresidential fixed investment and exports made modest positive contributions to first quarter growth, but I'd really like to be seeing them contribute much more.
But I suppose an optimist could see in all this the potential for much better numbers to come once the recovery gets on track. And even if growth of real final sales remains tepid, Inventory restocking could continue to make a big contribution to GDP growth the rest of this year.
(1) Both the optimists and pessimists are correct. What matters is the relative strength of the optimistic factors vs. the pessimistic factors.
(2) If there were no pessimistic factors operating, we should have expected a strong V-shaped recovery like 1983-84. Because the pessimists are correct about elements of weakness in the economy, we are likely to get a recovery that is only half as strong, maybe a bit more, than 1983-84, in the range of 3% to 4%. (The annualized growth rate of real GDP between fourth quarter 1982 and fourth quarter 1984 was 6.4%).
Here’s one way of pulling the case of the optimists and the pessimists out of today’s BEA release. These are contributions to real GDP growth and by definition these contributions must sum to total growth of real GDP of 3.24%.
Optimists: total 5.06
Personal consumption expenditures +2.55 (of this 1.40 was goods, 1.15 was services)
Inventory change +1.57
Producers durable equipment and software +0.83
Federal government +0.11Pessimists total -1.82
Residential structures -0.29
Nonresidential structures -0.44
State and local government -0.48
Net exports -0.61What about the future? Clearly the contribution of inventory change is going to wind down to a smaller positive number. But both producers durable equipment and personal consumption expenditures seem to be picking up steam and are likely to be stronger in the second quarter than the first. The turnaround of employment from shrinkage to growth will inevitably boost growth in disposable income and thus in consumption. Producers durable equipment seems to be picking up as firms are replacing their IT equipment after a pause in 2008-09 when capital spending budgets were slashed.
Also, one component of the pessimists’ case is likely to turn around soon, and this is residential structures. The BEA artificially distributes housing starts across subsequent quarters, so the negative for the first quarter of 2010 reflects the decline in housing starts that happened a year ago. Actual housing starts in the first quatyer were up 19% year over year and building permits were up 22%, according to National Association of Home Builders data.
One point to note is that the federal government number doesn’t provide much evidence of any effect from the Obama stimulus. A big puzzle is why it is taking so long for the stimulus money to show up in the GDP accounts. The major downside risk for the economy is that the negative contribution of state and local government will get progressively worse.
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