Real GDP increased at a 2.2% pace in the first quarter, a full percentage point below most market expectations, and well below the 3% pace of the fourth quarter in 2011. Strong gains in consumer spending (juiced by unseasonably warm weather and a spurt in employment) and a pickup from low levels in the housing market were the major drivers of gains in the first quarter. The question is how much of the momentum in consumer spending can be maintained, now that employment has slowed. This is to say nothing of the drain in savings, which cannot be sustained in light of the ongoing constraints on credit growth. The bulk of growth in new credit is going to student loans, which does very little to boost overall consumer spending.
We also saw an increase in exports, but they have slowed considerably from the pace we saw when both Europe and China were doing better in mid-2011; a somewhat unwanted increase in inventories added to the already-inflated levels of the fourth quarter. This sets the stage for some slowdown in manufacturing activity in the second quarter of 2012; we have already begun to see this in the data for new orders and regional manufacturing indices.
The big disappointment in the composition of growth came in business investment, which declined on a fall in commercial construction activity. Spending on equipment was also anemic, which is a problem as it suggests that businesses remain cautious about making investments in the future of the U.S. economy, but this is somewhat inconsistent with the other data for the quarter. Government spending also continued to contract as we have cut back on defense spending with troops returning from Iraq.
Bottom Line: Final sales, which get to the core of economic activity, increased at a paltry 1.6% in the first quarter, only 0.5% above the miserable pace of the fourth quarter. That is at least a percentage point below where it should be in a subpar recovery; it’s several multiples below what we would be seeing if the recession had been triggered by more traditional factors (inflation or inventories) instead of a financial crisis. Those who argue that the depth of the recession alone should determine the magnitude of the recovery just don’t understand the damage done during the financial crisis and how we are still feeling the aftershocks of that crisis today.