Saturday, April 28, 2007

About U.S. GDP Report

U.S. first quarter GDP growth, at 1.3% in the "advance" release, came in just as weak as I predicted a month ago, when I wrote it would be 1-2%. As always with the advance number, it could be revised later, but as there is no reason to assume that upwards or downwards revisions are more likely, they can nevertheless be analyzed.

Looking at the specific components, they were mostly in line of what I expected although personal consumption and business investments were somewhat stronger than I had expected, while government demand was seemingly weaker.

However, government demand wasn't really that weak. Nominal growth was in fact much faster than in the fourth quarter. The price index used for government demand accelerated sharply in the first quarter after increasing unusually little during the fourth quarter. As a result government demand increased to their highest proportion of GDP since 1993 (except for the first half of 2003 when the invasion of Iraq temporarily boosted military spending).

Business investments came in above zero. However, they fell as a proportion of GDP, and despite the slight recovery in March, orders for investment goods are still running lower than during a few months ago, meaning that business investments are likely to turn down during the fourth quarter.

Personal consumption will likely continue to grow during the second quarter, in part because of the stock market rally. However, it will likely grow a lot slower than the first quarter's 3.8% number, in part because of rising oil prices and a likely accelerated food price increase.

One interesting thing is that $50 billion in bonuses was attributed to the fourth quarter in the national accounts, while in the personal income accounts they were attributed to the first quarter. As a result, the personal savings rate seemingly rose from -1.2% to -1.0%. If they had been attributed to the fourth quarter, as in the calculation of national income, the savings rate would have instead fallen from -0.7% to -1.5%. With the bonuses being ended by March, the savings rate will likely fall during the second quarter.

As for the other components, it is more difficult at this point to say how they will develop. However, the most likely scenario is for a continued decline (albeit at a slower rate) in residential investments due to the continued high inventory level of new homes. Inventories will probably post a small decline, while the trade deficit will likely be more or less flat as a weaker dollar will boost exports while higher oil prices will increase the cost of imports.

Adding it all up, the most likely scenario is for second quarter growth to be even weaker than during the first quarter, but that growth will nevertheless stay above the key zero threshold, as increases in personal consumption and government demand will outweigh declines in investments. Of course, growth driven entirely by consumption is hardly healthy, and certainly implies a risk of growth falling below zero during the third quarter.


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