1Q GDP Report Came In Below Expectations

This morning’s advance report on first quarter gross domestic product was a bit of a disappointment. The Commerce Department reported that 1Q GDP rose only 2.2% (annual rate). That was below the pre-report consensus of 2.5%-2.6% and considerably below the 4Q rate of 3%.

The report noted that growth in the 1Q was driven by consumer spending, exports, private inventory investment and residential fixed investment. Negatives to growth in the 1Q were a slowdown in federal, state and local government spending and non-residential fixed investment.

Gross Domestic Product

Personal consumption expenditures increased 2.9% in the 1Q, compared with an increase of 2.1% in the 4Q. Real federal government consumption expenditures and gross investment decreased 5.6% in the 1Q, compared with a decrease of 6.9% in the 4Q. State and local government consumption expenditures and gross investment decreased 1.2%, compared with a decrease of 2.2% in the 4Q.

The price index for gross domestic purchases, which measures prices paid by US residents, increased 2.4% in the 1Q, compared with an increase of 1.1 percent in the 4Q. Excluding food and energy prices, the price index for gross domestic purchases increased 2.2% in the 1Q, compared with an increase of 1.2% in the 4Q.

Upon further analysis of the underlying data, today’s GDP report is more disappointing than the 2.2% number might suggest.  While a 2.2% number does confirm that the economic recovery continued in the 1Q, the fact that it was led primarily by consumer spending raises questions as to the recovery’s durability.

We know, for example, that the unusually warm weather in the first three months of this year pulled some spring (and possibly early summer) consumer demand into January-March. Spending was particularly robust on long-lasting items like autos, with durable goods spending rising 15.3% in the quarter (even though durable goods orders plunged 4.2% in March, much worse than expected).

Thus, there is a feeling that consumer spending may taper off some in the 2Q and 3Q. There is also a feeling that consumer demand could ease further in the 4Q due to the expected uncertainty about the presidential election in early November. The bottom line is, the more we look at today’s GDP report, the more disappointing it is.

Today’s GDP report comes on the heels of yesterday’s disappointing initial unemployment claims report. The Department of Labor reported that initial claims for new state unemployment benefits rose by 388,000 last week, versus the pre-report consensus of 365,000. Last week’s claims number was revised up from 386,000 to 389,000.

This is the third week in a row when initial claims were higher than expected.  These numbers suggest that next Friday’s national unemployment report for April may see an increase. You will recall that the official unemployment rate fell to 8.2% for March.

[In case you missed it, I had a blog post on Wednesday that discussed the Fed policy meeting held on Tuesday and Wednesday. As I have argued recently, Bernanke confirmed on Wednesday that QE3 is still on the table.]

Have a great weekend everyone!

 

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