Each quarter of the year, a comprehensive report comes out that measures overall economic growth. Of the various economic reports that are issued, this one gives the most complete picture of the U.S. economy.
For the first quarter of the year preliminary GDP growth was .5%. For those not familiar with the term GDP, it stands for Gross Domestic Product. There will be two revisions to this number, though the final report should not be significantly different than the initial reading.
An average reading of economic growth has historically been around 3%. However, during the last 15 years economic growth has averaged about 2% per year. Whether someone considers 2% or 3% to be the norm, .5% is not very good.
It should also be noted that the economic growth figure being referenced is considered “real” GDP growth, that is adjusted for inflation. Sometimes “nominal” GDP will be reported, which includes the change in the overall price level. For example, if real GDP is reported at .5% and inflation is 1.5% then nominal GDP would be 2%.
When looking at the components of GDP, consumer spending or Consumption is the largest category, accounting for roughly two thirds of the total. For the quarter Consumption increased 1.9%, which was significantly higher than the overall .5% figure. Consumer spending was centered more on services versus goods, as the pace of new auto sales slowed down.
Another area of strength was Residential Investment, which is new home construction, and that increased 15%. While real estate activity can vary significantly across different parts of the country, this number confirms that residential construction is strong for the U.S., as a whole. Strong price increases in our local area can certainly attest to that.
The area of the most significant weakness was Business Investment, which was down 6%, of which equipment spending was the weakest category. This is an area of concern, since if businesses are not investing in new equipment, we are less likely to see improvements in productivity. In recent years productivity growth has been quite weak, in part due to lackluster investment spending.
Trade also was a modest drag on overall GDP growth, as exports declined 2.6% for the quarter. This was due to fairly sluggish growth overseas, and also the impact of a relatively strong U.S. dollar. Recently the dollar has weakened somewhat, so export activity will likely improve going forward.
Inventory changes can also impact GDP growth. Sometimes changes in inventories can impact GDP growth by more than a full percentage point, though over time these changes in inventory accumulation are typically reversed in subsequent quarters.
Economists often look at the real final sales number, as a better gauge, since that removes the effect of inventory changes. For the first quarter of the year the Real Final Sales number was .9%. That was still a fairly weak number, but not as bad, as the official .5% figure in the GDP report.
One thing to be mindful of, is that these quarterly GDP numbers can bounce around quite a bit throughout the year. That is, if underlying growth is closer to 2%, one quarterly reading of .5% and another one of 3.5% would not be too surprising. One somewhat worrisome trend is that the fourth quarter figure for 2015 of 1.4% growth was also below trend, so we have two quarters in a row of relatively weak numbers.
If we look at other economic data, things do not look quite as bad. Employment growth continues to be quite solid so far this year, and has shown little change in the trend we saw in 2015. Other data has been somewhat mixed, but is not giving any indication that the economy is heading towards a recession.
Most likely economic growth will be stronger later in the year. We have seen relatively weak first quarters in recent years, and then economic activity improves later in the year.
However, for now it doesn’t appear that the economy is going to accelerate much beyond the 2% pace we have seen in recent years, especially with consumers not overly confident at the present time.