The Bureau of Economic Analysis announced that real gross domestic product (GDP) rose 2.5 percent in the first quarter of 2013, according to initial estimates. While faster than the 0.4 percent growth rate experienced in the fourth quarter of 2012, this figure was below the consensus estimate of around 3.0 percent or higher that economists were expecting.
First, let’s look at the relative strengths in this report. The consumer continues to spend, albeit with a slight pullback in the first quarter. Goods consumption grew 3.3 percent, building on the 3.6 percent and 4.3 percent growth rates seen in the last two quarters of 2012, respectively. Durable goods spending accounted for the bulk of the increase, adding 0.62 percentage points to real GDP growth. Motor and other vehicles were a large part of this story. Nondurable goods, in contrast, contributed 0.16 percentage points to growth.
In short, the consumption of goods added 0.78 percentage points to real GDP, below the 1.02 percent seen in the quarter before. At least part of this easing could be explained by higher payroll tax rates, but this is still a relatively healthy increase. Meanwhile, service sector spending rose 3.1 percent, adding 1.46 percentage points to growth.
The largest contributing factor in the first quarter report was gross private fixed investment, which increased 12.3 percent and added 1.56 percent to growth. Almost all of that contribution, though, came from the replenishment of inventories (adding 1.03 percent) and spending on housing (adding 0.31 percent).
Even with such a strong figure, the fixed investment numbers provide a degree of caution, echoing anxieties in the larger economy that we see in other economic indicators. If you remember, the fourth quarter 2012 real GDP numbers declined largely on a drop in inventory spending (subtracting 1.52 percentage points), and the bounce back in the first quarter was not proportional.
In addition, nonresidential fixed investment grew very modestly in first quarter, suggesting that businesses might still be somewhat apprehensive. Spending on structures, industrial equipment, and transportation equipment declined, and overall investments in equipment and software eased substantially, down from a contribution of 0.82 percent in the fourth quarter to 0.23 percent in the first quarter.
Outside of consumption and business spending, the latest GDP data provided mostly negative readings on the contribution of net exports and government spending. Both were drags on growth, subtracting 0.5 percentage points and 0.8 percentage points, respectively, from real GDP in the first quarter.
On the trade front, goods exports increased 3.5 percent in the first quarter. This was a decent number, and certainly one that was better than the 5.0 percent drop in the fourth quarter. With some improvements in the global economy, this suggests that manufacturers are finding some opportunities overseas to increase their sales. Unfortunately, it was counteracted by a 5.2 percent increase in goods imports for the quarter, making the contribution of net exports negative.
The government spending components were all negative across-the-board. Given tight budgets at all levels of government, this should not be a surprise, especially with the impact of federal budget sequestration just beginning to have an impact. Federal spending subtracted 0.65 percentage points from real GDP, almost all of that from lower defense spending.
Today’s real GDP numbers were mixed news. First, they confirmed that the U.S. economy appears to be stuck in neutral. Despite expectations for a stronger quarter, there were still components with weaknesses. That can best be seen in the nonresidential fixed investment numbers, which seem to indicate a continued pullback in businesses’ willingness to invest in new plant and equipment. Trade and government spending were drags on growth, with the latter expected due to the across-the-board federal budget cuts. And, even consumer spending – while healthy in general – has some easing in its contribution levels to real GDP.
The report suggests that the economy is growing as I have expected it to grow for the year as a whole. I continue to predict growth of 2.4 percent for 2013. These levels are just ok, and ideally, we would strive for growth of 3.5 percent or better. To get there, we need pro-growth policies from Washington, and we will need for manufacturers to once again start having out-sized contributions to macroeconomic activity. That will mean that we need a firmer foundation than we currently have.
Chad Moutray is chief economist, National Association of Manufacturers.
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