The Bureau of Economic Analysis revised its first quarter 2013 real gross domestic product (GDP) estimate from 2.5 percent to 2.4 percent. This revision was mostly in-line with consensus estimates, and for the most part, there were few changes from the original release last month. Of the key changes from the past estimate, personal nondurable goods consumption growth was higher than first reported, but reduced levels of inventory investment, exports, and local government spending offset that gain.
Strengths in the economy in the first quarter included the following:
- Consumer spending: The American consumer continues to help boost the overall economy, with personal consumption increasing 3.4 percent in the first quarter, its strongest growth rate since the fourth quarter of 2010. Durable and nondurable goods purchases alone added nearly one percentage point to real GDP.
- Business spending: The largest contributor to growth in real GDP in the quarter came from gross private domestic investment, which rose 9.0 from the previous quarter. This added 1.16 percentage points to real GDP, with the biggest contributions coming from inventory replenishment, an improving housing sector, and investments in equipment and software. At the same time, it is also clear that the pace of growth for nonresidential spending has slowed, which was particularly noticeable for new construction and purchases of computers and industrial equipment.
At the same time, some of the weaknesses include:
- Government spending: With tighter budgets and across-the-board federal spending cuts (e.g., sequestration), government spending subtracted almost one percentage point from real GDP. Defense spending was the largest drag, but state and local spending was also a pull on growth in the quarter. Given the current budgetary debates, government spending is likely to continue to be a negative on growth for the foreseeable future.
- Net exports: With slower growth in economies worldwide, we have seen very slow growth in exports so far in 2013. Goods exports rose 0.3 percent in the first quarter, but this was outpaced by 1.1 percent growth in goods imports. Overall, the net export of goods and services subtracted 0.21 percentage points from real GDP for the quarter.
In summary, today’s revision in real GDP did not change the overall storyline for economic growth in the first quarter or for the year as a whole. The U.S. economy is growing modestly, with businesses and the consumer boosting activity. Even the pace of nonresidential investment has slowed somewhat, mirroring some of the continuing uncertainties in the marketplace right now, particularly for manufacturers.
Note that personal consumption and gross private domestic investment alone added 3.56 percentage points to real GDP, with government spending and net exports subtracting from that number. Clearly, reduced government spending and very slow increases in export sales have lowered real GDP growth.
Moving forward, I expect real GDP to grow by 1.8 percent in the current quarter, with 2.3 percent growth overall for 2013. Those numbers are decent, but definitely not great. We would like to see much faster growth in the U.S. economy, and that is why we continue to push for pro-growth policies from Washington.
Today’s real GDP numbers were mixed news. First, they confirmed that the U.S. economy appears to be stuck in neutral with modest growth. Despite expectations for a stronger quarter, there were still some components with weaknesses. This weakness can best be seen in the nonresidential fixed investment numbers, which seem to indicate a continued pullback in businesses’ willingness to invest in new plants and equipment. Trade and government spending were drags on growth, with the latter expected due to the across-the-board federal budget cuts. Even consumer spending – while healthy in general – has seen some easing in its contribution levels to real GDP.
The economy is growing more or less where I see it growing 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 making large contributions to macroeconomic activity. To get there we will need to be on firmer ground than we stand today.
Chad Moutray is chief economist, National Association of Manufacturers.
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