GDP Picture: April 28, 2005

April 28, 2005

Growth rate slows in first quarter of 2005
The Bureau of Economic Analysis (BEA) reported today that real gross domestic product (GDP) increased at an annual rate of 3.1% in the first quarter of 2005, down from a 3.8% growth rate in the fourth quarter of 2004. This is the slowest growth rate since the first quarter of 2003.

Personal consumption expenditures and private fixed investment decelerated from the fourth quarter, posting growth of 3.5% and 5.0%, respectively, compared to 4.2% and 10.5% in the previous quarter. Total investment grew at a 12.5% rate because of more rapidly accumulating inventories.

The upshot of the slow GDP growth and the strong contribution of inventory accumulation is that this quarter saw significant weakening in domestic demand, with final sales to domestic purchasers rising only 3.2%, compared to average growth of 4.2% in 2004. This is, like the overall growth number, the weakest performance in terms of domestic demand since the first quarter of 2003.

Growth in GDP, domestic purchases, and final sales of domestic output

Moreover, the rising trade deficit continued to exert a strong drag on growth. Export growth of 7% was swamped by import growth of 14.7%, leading net exports to pull down overall economic growth by 1.5%. Because imports met so much of domestic demand, the demand for domestic output grew at only a 1.9% rate (down from 3.4% in the fourth quarter).

Real disposable personal income (personal income minus taxes) declined in the first quarter of 2005 by -0.3%. This is the first decline in this number since the third quarter of 2002. However, this decline from the previous quarter can be attributed to the unusually large boost to personal income in fourth quarter of 2004 that resulted from a large one-time dividend payout of the Microsoft Corporation.

The continuing weakness in the labor income, particularly private-sector wage and salary growth, can be seen in the chart below. Since the recovery's start in the fourth quarter of 2001, (real) private wage and salary income is up only 5.3%. The average for all economic recoveries that lasted 11 quarters or more from 1947 to 1982 is 18.3%, and even the "jobless recovery" of the early 1990s saw 8.1% growth. Workers' wages have yet to see much evidence of this recovery.

Growth in labor income, 13 quarters into recovery

Inflation, while still relatively low by historical averages, picked up a bit in the first quarter, with overall prices rising by 3.3%, compared to 2.3% growth in the previous quarter. The "market-based" index for personal consumption expenditures, excluding food and energy (a commonly used measure of "core" inflation), rose by 2.2% in the first quarter, up from 1.7% in the previous quarter.

In the end, the news from today's BEA report is not encouraging. Domestic demand for U.S. production has significantly weakened, and this quarter's large inventory accumulation may reduce firms' needs for new production in coming quarters. Furthermore, labor income has yet to see much gain from the recovery. These considerable "soft patches" in the economy should be monitored closely.

By EPI economist Josh Bivens

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