The U.S. economy expanded at a robust pace in this year’s first quarter, the Bureau of Economic Analysis reported this morning. Real GDP increased by 3.2% on an annualized basis in the first three months of 2010. That’s considerably lower than the 5.6% surge in the previous quarter. But no one expected the powerful momentum in Q4 2010 to continue. The question was (and remains): How much will the economy slow after the initial snapback from the Great Recession? With fiscal and monetary stimulus destined to fade, the economy faces a transition. For now, growth still has the upper hand. The latest numbers, albeit the first of three estimates, suggest that the expansion has a foothold. Encouraging as that is, there’s still some concern about the quarters ahead. The risk that the rebound will stall is lower these days, but not yet low enough to dismiss the idea completely.
“We’re still running on the fumes of stimulus in the U.S. economy,” Diane Swonk, chief economist at Mesirow Financial, advised via the LA Times. “It’s a recovery, but by any standard is still a muted recovery. But we’re thankful to have what we’ve got,”
For the moment, however, there’s reason to celebrate today’s numbers. Let’s start by looking at the broad trend. As our first chart below shows, GDP’s 3.2% rise in the first three months of this year marks the third consecutive quarterly increase. That’s a notable downshift from the previous quarter, but by any other comparison the economy started the year on a strong note. What’s more, the rebound was broad based: consumer spending, investment and exports all posted healthy gains in Q1.
In fact, Joe Sixpack’s affinity for spending accelerated in the first quarter. The 3.6% jump in personal consumption expenditures in Q1 is the strongest quarterly rise in three years.
Within the consumer spending category, the strongest segment was in durable goods, which posted a real 11.3% jump in Q1, sharply higher over the meager 0.4% rise in Q4 2009. Considering that durable goods are the most cyclical sensitive of all the spending categories, the strong showing in the January-March period is encouraging for thinking that consumers are willing and able to spend. In an economy that draws some 70% of GDP from retail consumption, that’s no trivial point at this critical stage of the economic rebound.
But while the upward momentum in the consumer sector was unmistakable in Q1, there was a downshift in corporate investment. Gross private domestic investment (GDPI) grew in the first three months of this year, but at a considerably slower rate compared to last year’s Q4, as our next chart below shows. Granted, the 14.8% rise in GDPI is healthy. The question is whether the slowdown has legs? In other words, is the business sector set to turn cautious in the months and quarters ahead? If so, the consumer must shoulder more of the burden for keeping the rebound bubbling. Of course, that’s less than a fail-safe proposition, given the existing headwinds on household balance sheets, thanks to the crushing losses in residential real estate and heightened debt levels built up during the pre-2008 boom.
Adding to the anxiety about corporate America’s prospects is the slowdown in exports in Q1. Although the value of net exports was comfortably in the black, the 5.8% rise was well below Q4 2010’s 22.8% blowout. Much has been made recently of the necessity of keeping America’s export machine humming as a critical element in maintaining the economic recovery. As such, the sharp deceleration in exports in Q1, while not unexpected, raises questions about what comes next.
Overall, it’s hard to complain. Surely the GDP report could have been a lot worse. The issue isn’t about Q1. As broad economic reports go, today’s news is encouraging. As such, the only remaining issue is whether the trend is sustainable. On that question there are several hazards lurking. The first is the labor market. Without a sustained increase in job creation, the Q1 numbers are almost surely headed for lesser levels in future reports.
There’s also the issue of whether today’s good news is still drawing strength from the so-called restocking effect. In the wake of the deepest recession since the 1930s, a certain amount of rebounding was destiny, and at an extraordinarily strong pace. Consumers and corporations went overboard in 2008 and early 2009 in cutting back on spending and investing. Understandably so, given the dire outlook in the months following the financial crisis in the fall of 2008. When it became clear that the system wouldn’t collapse, the economy responded accordingly. Was this a temporary readjustment? Or can growth continue without government stimulus and unusually strong cyclical resilience that was virtually assured in the wake of the Great Recession?
The answer increasingly depends on the labor market. There are reasons to be optimistic, as the previous payroll report suggests. Next Friday’s update on April’s labor market will undoubtedly be closely watched. In essence, the crowd will want to know if the cheer surrounding today’s GDP report is warranted. The next big clue arrives a week from today.
“It was a very strong quarter for the consumer,” said Nigel Gault, chief U.S. economist at IHS Global Insight, via Bloomberg BusinessWeek. “The important thing in the coming months is seeing employment starting to come back to give some income support.”