Last Friday, the Greenback took hits against its major counterparts when Uncle Sam’s Advance GDP report disappointed expectations.
It printed a 2.5% growth rate for the first three months of 2013. It might be a lot better than the -0.1% downtick that we saw for Q4 2012, but it’s still a lot lower than the 3.1% growth that analysts were looking for.
Is it all that bad? Should we be concerned that the U.S. only grew by 2.5%? Let’s break down the numbers.
A quick glance at the figures would show that government spending took its toll on the economy. It continued to decline in the first three months of the year, dropping by another 8.4% after printing at -14.1% in the previous quarter. From the looks of it, it would seem that most of this was due to the Congress’ sequestration as automated federal spending cuts were implemented.
The U.S. trade balance also weighed down the reading. While exports were up, contributing 0.4 percentage points to the GDP, it was offset by the rise in imports which subtracted 0.9 from the headline reading. (Remember that imports are treated as a negative component of the GDP since they reflect capital outflow from the economy.)
Also notice that fixed investments grew at a slower pace during the quarter. It only contributed a mere 0.53 percentage points to growth after accounting for 1.69% of overall growth for Q4 2012.
While residential investment jumped by 12.6% following a 17.6% growth rate in Q4 2012, investments in non-residential structures took a big hit. It declined by 0.3% after posting a robust reading of 16.7% in the previous quarter.
The GDP report wasn’t all about gloom and doom though.
For one, consumer spending still had a positive contribution despite the expiration of payroll tax cuts. Personal consumption rose by 3.2% during the quarter, which is the highest reading we’ve seen since the first quarter of 2011.
This surge was led by spending on durables, growing by 8.1%. Meanwhile, spending on services posted its strongest growth since 2005 at 3.1%. Most analysts attribute this uptick to a rebound following Hurricane Sandy and the cold weather.
Consequently, overall consumption translated to a 2.24 percentage point-contribution to the GDP.
Businesses also re-stocked their shelves during the quarter with inventories rising adding 1.03 percentage points to the GDP after dropping by 1.52 at the end of 2012.
If we look at the overall picture, the fact that consumer spending actually held up despite the significant decline in disposable income is definitely something to be happy about.
Unfortunately, Uncle Sam’s economic growth won’t be sustained if the government’s spending cuts continue to take its toll on the economy. My worry is that consumer spending will soon give in to lower disposable income once the seasonal impact of Hurricane Sandy and cold weather fade.
So, in this humble old man’s opinion, the GDP report for the first quarter of 2013 is definitely good news. The more important question to ask is, will growth be sustained in the coming months or is this as good as it’s gonna get? What do you think?