Friday, April 27, 2007

GDP Growth Update

This morning the BEA released its first ("advance") estimate of GDP figures for the January-March period of 2007.

First of all, let me give the appropriate qualifier: this is a very early estimate, and subject to substantial revision. For the fourth quarter of 2006 the advance estimate was 3.5% growth, the preliminary estimate was 2.2% growth, and the final number was 2.5%.

Now, on to today's data. From the BEA news release:
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 1.3 percent in the first quarter of 2007, according to advance estimates released by the Bureau of Economic Analysis. In the fourth quarter, real GDP increased 2.5 percent.

...The deceleration in real GDP growth in the first quarter primarily reflected a downturn in exports, an upturn in imports, a deceleration in PCE for nondurable goods, and a downturn in federal government spending that were partly offset by a smaller decrease in private inventory investment, an upturn in equipment and software, a smaller decrease in residential fixed investment, and an acceleration in PCE for durable goods.
This is a yucky report. I do not like this report at all. The consensus forecast was for a number in the neighborhood of 1.8%-2.0%, so the overall number is clearly disappointing. But more than that, the details of this report paint a picture of a broadly slowing US economy, and that's what really makes me unhappy.

Breaking down GDP growth into its components makes it easier to see where the strengths and weaknesses in the US economy are right now. It's no surprise that residential investment is the biggest drag on the economy, now down about 17% from one year ago. But growth in other business spending is also slowing down worryingly - non-residential investment has only grown by about 3% over the past year, compared to 6-8% growth from 2004-2006. Even export growth has slowed. The only bright spot in the economy is the consumers keep steadily increasing their spending, by about 3.4% over the past year.

The thing that worries me the most is how personal consumption is now virtually the only thing keeping this economy going. But this may not be sustainable, given continued weak income growth and the end of the real-estate ATM that millions of individuals had used to bolster their consumption in recent years. If consumption growth starts to follow income growth, the US economy could be in for some serious trouble.

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