GDP Falling Back to 2.2% is Not Surprising

The BEA released first quarter of 2012 GDP data this morning, with the headline figure coming in at 2.2 percent growth. This was to be expected.

GDP growth for the last quarter of 2011 was primarily built on businesses spending money to add products to their inventories. It was further manipulated by a low adjustment for inflation. Even with BEA today reaffirming its 3.0 percent growth rate for 4Q2011, there is still a measure of cognitive dissonance and gaming of the figure to look stronger than growth on Main Street really was.

Now we get a 2.2 percent for 1Q2012 figure.

One positive is that personal consumption accounted for 2.04 of the 2.2 growth, compared to 1.47 of 3.0 at the end of 2011. In contrast inventory building was just 0.59 percentage points of the 2.2 percent growth figure, relative to 1.81 percentage points added to 4Q2012.

The major negative shift in bringing down GDP growth, however, was a combination of reduced inventory building and decline in non-residential fixed investments, like buildings, equipment, and software.

So at the end of 2011 businesses were spending a lot, likely to take advantage of depreciation rules that allowed many fixed investments to be written off of taxes at 100 percent, and consumers were a bit tepid in the holiday season. For the first three months of 2012, consumers are spending a bit more, and saving a bit less.

The reduced savings rate, from $466.0 billion in the first quarter compared with $530.8 billion in the fourth (or 3.9 percent in the first quarter compared with 4.5 percent in the fourth), means more contribution to GDP in this measurement period, but it also means less stability for the long term. One of the problems of the economic boom from the 1980s through the 2000s was that it was build in part on a declining savings rate.

In the chart below you can see that personal savings as a percentage of GDP fell steadily from 1982 (the end of the Reagan recession) to 2006 (the height of the housing bubble). During the recession there was a sharp bounce back in savings, but since the recession ended in mid-2009, the savings rate has begun to decline again.

Personal savings as a percent of GOD

Another way to look at savings is in fixed dollars. Here, data from the BEA shows that savings maintained a relatively stable line until the 2008-09 recession (spiking a bit in relative relation to its levels during the 2001 recession, but not much change measured against the 30 years measured here). But now the savings rate is falling. That could be interpreted as a positive thing for GDP growth in the coming quarters, or as signalling a return to imprudent spending behaviors by the American public and some new, unstable bubble.

Personal savings in fixed dollars

Other, somewhat neutral news was that consumption of automobiles and parts declined 27 percent from the last quarter of 2011 until now, though it was nearly double the rate from the first quarter of 2011.

We’ve now had six straight quarters of negative change in consumption of gasoline and other energy goods. And transportation services remained at a less than 2 percent change from quarter to quarter for the sixth straight month as well.