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GDP Picture, April 30, 2008

April 30, 2008

GDP growth anemic again

Since When Is 0.6% Growth Good News?

by EPI economist L. Josh Bivens

Today’s Commerce Department report on gross domestic product (GDP) growth in the first quarter of 2008 provided mixed signals on the U.S. economy. Despite rising GDP—up 0.6%, same as in the fourth quarter of 2007—the underlying data in the report are actually flashing “recession.” Furthermore, given underlying population and productivity growth trends, any sustained period of GDP growth below 2.5% is a recipe for rising unemployment and sluggish wage growth.

Almost every indicator (except federal government spending and inventory changes) deteriorated relative to the already-weak results of the previous quarter. Declines in consumption spending, investment in equipment and software, residential and non-residential construction, exports, and imports all contributed to a deceleration in overall growth; in fact, some areas saw outright contraction.

Residential investment fell for the 9th straight quarter, and, its 26.7% drop was the largest quarterly change since the decline began. Given that the recent data on 20 of the largest metropolitan areas show home prices falling at an annual rate of 23% in the last three months, it seems that there is more fall out to come in the residential investment market.

Non-residential investment, as predicted, finally followed residential investment and shrank this quarter as well, falling by 6.2%. Investment in equipment and software fell for the first time in over a year, posting a 0.7% decline.

This broad weakness can be seen most clearly in final sales (GDP excluding the effects of inventories), which shrank by 0.2% after rising 2.4% in the previous quarter. Given the volatility of inventory investment, the final sales number is often thought of as a clearer measure of the underlying strength of the U.S. economy. Domestic demand growth (final sales to purchasers located within the United States) shrank even more, falling 0.4%.

Some rare good news was found in reported inflation. The market-based “core” measure (that is, excluding food and energy costs) of price growth in personal consumption rose only 1.7% in the past year, down from 1.9% growth in the previous quarter. While food and energy inflation is every bit the danger to family budgets as other costs, inflation in food and energy is generally driven by the supply-side influences (a rising global price of fuel, for example), and not by overheating in the domestic economy. This tame measure of core inflation gives the Federal Reserve plenty of room to attack the current economic softening without any danger of setting off broader inflationary pressures.

While GDP did not outright shrink this quarter, this does not mean that the U.S. economy has dodged a bullet. The economy may well be in recession currently, and the 0.6% growth in the last three months of 2007 was followed by three straight months of negative job growth (totaling 232,000 jobs lost so far in 2008). There is little reason to expect this quarter’s qualitatively worse performance to change this unfortunate trend. Given that employment must rise by roughly 1.1% annually to absorb a growing working-age population, and that productivity in the U.S. economy has grown roughly 1.4% in the very recent past, GDP growth essentially has to exceed 2.5% to keep unemployment from rising and to keep the resulting labor market slack from smothering wage growth.

Evidence on this point could be seen in another government release today, the Employment Cost Index (ECI) from the Bureau of Labor Statistics, which showed that wages and salaries for the civilian workforce lagged inflation over the past year, falling 0.7% in inflation-adjusted terms from March 2007 to March 2008 (a period which saw the unemployment rate climb by 0.7%).

All in all, there is little in this report to reassure American families about the economy. GDP will almost certainly shrink at some point in the coming year, and even if it manages to not cross the zero line, it is clear that economic growth sufficient to keep unemployment from rising and wages from falling is neither here nor on the horizon.

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The Economic Policy Institute GDP PICTURE is published quarterly upon release of the Commerce Department’s quarterly GDP report.

EPI offers same-day analysis of income, price, employment, and other economic data released by U.S. government agencies. For more information, contact EPI at 202-775-8810.

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