Friday, April 30, 2010

Moderate U.S. Growth Continued

The U.S. economy grew at a rate of 2.4% adjusted for terms of trade changes during the first quarter. Rising consumer spending, business investments and increased inventories all contributed to growth, while falling government demand, falling residential investments and a higher trade deficit held back growth.

The fact that government spending fell (Only state & local government spending fell. Federal spending rose moderately) , while private spending rose is arguably the most bullish aspect of the report.

Less positive is that the increase in private growth rested on a big drop in the savings rate and rising inventories. Rising asset prices are causing people to draw down savings, just like during the housing bubble. Between Q2 2009 and Q1 2010, the savings rate dropped from 5.4% to 3.1%. This is still somewhat higher than during the housing bubble, but now the budget deficit is far higher, so the national savings rate is in fact much lower than during the housing bubble.