The Bureau of Economic Analysis reported today that gross domestic product (GDP)—the broadest measure of the nation’s economic activity—expanded by 2.5 percent (expressed as an annualized rate) in the first three months of 2013. This is up from the previous quarter’s 0.4 percent growth as well as an improvement over the 2.2 percent growth of 2012. Yet this 2.5 percent rate is essentially just above stall speed, as it will exert only the slightest downward pressure on unemployment.
Further, final demand—which strips contributions to GDP made by volatile (but trivial over long stretches) changes in inventory—grew just 1.5 percent.
Personal consumption expenditures grew 3.2 percent during the first quarter, their strongest showing since the end of 2010. Residential investment continued to grow strongly, rising by 12.6 percent. Equipment and software investment, however, seems to be decelerating, rising by 3.0 percent in the first quarter, following 7.3 percent growth in 2012 and growth rates between 11 and 12 percent for 2010 and 2011.
Both federal and state and local government spending contracted in the first quarter. The fingerprints of contractionary fiscal policy are evident in this report. The drag from federal government spending cuts was predictable, as was the decline in disposable personal income (discussed in greater detail below) stemming from the expiration of the temporary payroll tax cut (with no offsetting stimulus to replace it). Defense spending fell rapidly again, contracting by 11.5 percent as compared with the previous quarter’s 22.1 percent contraction. But non-defense spending also fell this quarter, contracting by 2.0 percent. State and local spending contracted by 1.2 percent. Hopes for an end to the state and local drag on growth seem now to have been premature.
The rising trade deficit subtracted 0.5 percentage points from the quarter’s overall growth rate—the first negative contribution from trade flows since the second half of 2011.
A key measure of inflationary pressure watched by policymakers continues to signal that these pressures are extraordinarily muted. The “market-based” price index for core personal consumption expenditures (excluding food and energy prices) rose by just 1.4 percent since the same quarter a year ago. This measure has reached as high as 2.0 percent in just a single quarter since the official recovery from the Great Recession began in the second quarter of 2009. This signals strongly that the economy’s anemic growth continues to be driven by deficient demand for goods and services.
Real disposable personal income fell by 5.3 percent. Some of this was driven by exceptionally high dividend payments (which in turn were driven by fears that increased dividend tax rates would be part of a deal addressing the “fiscal cliff”) in the previous quarter that inflated those numbers. However, as previously noted, much of it was also driven by the expiration of the temporary payroll tax cut—passed as economic stimulus for 2011 and 2012—at the end of 2012.
The decline in disposable personal income paired with rapid growth in consumer spending led to the lowest savings rate (2.6 percent) since the last half of 2007. If this quarter’s anemic domestic demand growth of 1.9 percent can only be driven by savings rates drifting back to bubble-era lows, this seems a strong signal that much higher growth rates in the future driven by private spending are unlikely—absent a strong labor market recovery that pushes up wage growth.