By Steven Hansen and Doug Short
First quarter 2011 advance USA gross domestic product (GDP) showed the output of goods and services increased at an annual rate of 1.8%. GDP is an imperfect view of the economy as it only represents approximately 1/3 of the monetary flows.
There is a disturbing current in 1Q2011 GDP.
The above table shows the percentage contribution to the percentage change in GDP. The sharp decline in government expenditures offset more than half of the gain in personal consumption expenditures, the largest growth area in the latest extimate. We will return to the topic of personal consumption expenditures later in this article.
Over the 21st century, the table below shows historical change data.
- Personal Consumption Expenditure is growing normally showing the consumer end of the economy is finally growing at historical rates.
- Gross private investment’s growth is sub-par. The element of this data point which stands out is change in private inventories which remains well above historical levels. GDP takes credit when a product is produced – not when it is sold. What this data point sometimes implies is a slowing economy, however Econintersect follows inventory-to-sales ratios which demonstrate inventories are well within normal ratios. This likely represents an unusual situation caused by manufacturing growth leading the economic recovery.
- The export/import ratios are very low compared to recent history demonstrating the strength in USA manufacturing export growth.
- But the big deal is the contraction in the government sector by more than 1%. To put this into perspective, you have to go back to the years following the end of WW2 (1945 – 1947) to find the government putting this significant headwind on GDP.
If this 1Q2011 GDP is any indication, the headwinds on the economy due to government cutbacks has been underestimated.
The bellweather of GDP, personal consumption, is behaving reasonably well. The chart below is a visualization of real GDP change since 2007. The stacked column chart segments the four major components of GDP with a dashed line overlay to show the sum of the four, which is real GDP itself.
Over this time frame, we see that the personal consumption expenditures component has shown the most consistent correlation with real GDP itself. When PCE has been positive, GDP has been positive, and vice versa.Will personal consumption and private domestic investment be able to continue to more than offset shrinking government expenditures? We should find out before this year is over.
GDP: Slower that Expected 1Q/2011 by Rick Davis
4Q2010 GDP Revised Down to 2.8% by Steven Hansen
Fourth Quarter GDP Up to 3.2% – Likely to be Revised Further Up by Steven Hansen
Officially Out of Recovery and into Expansion – NOT by John Lounsbury
Normalized GDP – The “Real” Growth by John Lounsbury