The Bureau of Economic Analysis announced that real gross domestic product (GDP) rose 2.2 percent in the first quarter. This is below the 3 percent growth rate experienced in the fourth quarter of 2011, but much of this was expected due to lower inventory replenishment needs in the first quarter. Inventories accounted for 1.81 percent of the 3 percentage points of growth in the fourth quarter as the economy started picking up steam. This was unlikely to be repeated moving into 2012.
Consumers accounted for the bulk of the growth in the first quarter, bucking lower sentiment amid worries about higher gasoline prices. In fact, personal consumption accounted for 2.04 percent of the 2.2 percent in growth for the quarter, or nearly all of it. This also shows the strength of the manufacturing sector continuing into the new year. Durable and nondurable goods consumption added 1.13 percent and 0.35 percent, respectively, (or nearly 1.5 percent) to real output in the quarter.
Other positives in today’s release include business investment and exports. Both of these were somewhat tempered from the previous quarter, however. Gross private fixed investment added 0.77 percent to growth (down from 2.59 percent, largely on slower inventory growth and reduced nonresidential spending). Meanwhile, goods exports were up modestly over the fourth quarter, but these were counterbalanced by higher imports. Overall net exports essentially added nothing to real GDP in the quarter.
Government continues to provide a drag on growth, something that is expected to continue. With defense and state and local government spending cuts, government reduced real GDP by 0.6 percentage points. This was, however, an improvement from the previous quarter’s 0.84 percent negative contribution.
Overall, these numbers are consistent with modest economic growth in 2012. I continue to predict that real GDP will increase around 2.5 percent this year, with industrial production up 4 percent. Moreover, these figures confirm the importance of manufacturing in our current economic environment, with durable and nondurable goods spending contributing nearly two-thirds of the net growth in the quarter. This is also a testament to the durability of the consumer, who – despite uncertainties in the economy and higher prices – has continued to spend.
Moving forward, a number of headwinds will continue to confront both manufacturers and the public at large. The global economy – in both Europe and elsewhere – has slowed, and despite progress in labor and housing markets, both remain weak. Manufacturers remain mostly positive about future activity, but as recent weaknesses in the data illustrate, such optimism is tenuous at best. 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 anxieties in the marketplace.