Below is the commentary from my Monday Economic Report:
The economy is growing modestly, up 2.2 percent in the first quarter of 2012, according to the Bureau of Economic Analysis. Consumers were one of the main drivers of activity, as personal spending accounted for nearly all first-quarter growth. This is a testament to the durability of consumers, who—despite economic uncertainty and higher prices—have continued to spend. As such, manufacturers continued to have an outsized role with durable and nondurable goods purchases, adding nearly 1.5 percentage points to growth. Exports were higher, but they were offset by increases in imports.
Still, real GDP rose less in the first quarter than in the previous one, which was up 3 percent. Business investment was lower, and this was largely a function of slower inventory growth. This was expected for the most part given that manufacturers ramped up strongly in the fourth quarter after a slower mid-2011, and inventory replenishment contributed largely to that story. Nonresidential construction was lower in the first quarter, and government spending continued to provide a drag on growth at the local, state and federal levels.
Many other economic indicators released last week showed slower growth in March and April in manufacturing and elsewhere. The Census Bureau reported a 4.2 percent decline in durable goods orders in March, and the Kansas City Federal Reserve observed slower manufacturing activity in its region. The Richmond Fed’s survey showed an uptick in production so far this spring. For that reason, the Chicago Fed has said that the U.S. economy is operating below its historical trend, with sluggish manufacturing growth being a key reason.
Moving forward, real GDP should increase around 2.5 percent this year, with industrial production up 4 percent. Manufacturers remain mostly positive about future activity, but as recent weaknesses in the data illustrate, such optimism is tenuous at best. A number of headwinds will continue to confront both manufacturers and the public at large. The global economy—in Europe and elsewhere—has slowed, and despite progress in labor and housing markets, both remain weak. Policymakers would be wise to adopt pro-growth strategies that will help to ensure growth for the rest of this year and beyond and, where possible, to alleviate marketplace anxiety.
This week, we will learn more about the current state of manufacturing. Today’s Chicago and Dallas regional releases will preview the Institute for Supply Management’s (ISM) purchasing managers’ index, which will come out tomorrow. Last month, ISM data moved higher, so it will be interesting to see if slowness seen in other indicators continues. The other main headlines this week will stem from new employment data out on Friday. Job creation appears to have eased from the faster pace of December and January, and April employment numbers are likely to repeat March’s. Manufacturers, though, have been a bright spot overall on the jobs front, adding nearly 150,000 jobs between December and March.
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