The Bureau of Economic Analysis reported today that U.S. real GDP grew at a 2.2% annual rate during the first quarter, down from the 3.0% growth of 2011:Q4, and below the 2.4-2.9% range that the FOMC indicated yesterday it is anticipating for 2012 as a whole. I see some reasons to agree with the Fed that the rest of the year may be slightly better than the first quarter.
Lower spending by federal, state, and local governments subtracted 0.6% from the first quarter’s growth rate. Continuing federal fiscal drag seems likely for the rest of the year. An even bigger disappointment in the 2012:Q1 GDP report might be nonresidential fixed investment. This had been making a solid contribution over the previous year, but subtracted 0.2% from Q1 growth. If business investment continues to make a negative contribution for the rest of the year, it could pose a stiff headwind.
But I think it’s worth emphasizing what’s been happening in two sectors that play a critical role in most business cycles. Housing contributed 0.4 percentage points to the 2.2% Q1 growth, and autos an additional 0.7 percentage points. These two categories usually make a big contribution both to the drop in GDP during a recession as well as to the rebound usually seen in the early recovery phase. For example, in the 2007:Q4-2009:Q2 recession, real GDP fell on average at a 2.7% annual rate, with autos and housing accounting for about half of this decline all by themselves.
One of the unusual features of the recent data is that these two key sectors contributed very little to the first two years of the recovery, with autos only adding 0.1 percentage point to the average annual GDP growth over 2009:Q3-2011:Q3 and housing actually exerting a very slight drag. However, the last 6 months have been closer to the typical pattern, with autos contributing 0.8% and housing 0.3%.
Moreover, further growth in these sectors from here does not require any pent-up demand. If sales simply get back to historical replacement rates and meeting population growth, it would be a huge improvement over where we are right now.
The slow pace of GDP growth continues to disappoint, particularly for the 12.7 million Americans actively looking for jobs and still unable to find them. On the other hand, the U.S. is unquestionably better off than would be the case had the September prediction of the Economic Cycle Research Institute that the U.S. was about to enter another recession proved to be accurate. The latest GDP report brings our
Econbrowser Recession Indicator Index down to 4.0%. For purposes of calculating this number, we allow one quarter for data revision and trend recognition, so the latest value, although it uses today’s released GDP numbers, is actually an assessment of where the economy was as of the end of the last quarter of 2011. The index would have to rise above 67% before our algorithm would declare that the U.S. had entered a new recession.