Five Takeaways from Today's GDP Report:
The U.S. economy grew at a rate of 2.5% in the first three months of 2013 –much better than the 0.4% growth rate at the end of 2012, but well below economists’ expectations. Experts are still digesting today’s report, but here are five initial takeaways.
Consumers look strong. The New Year greeted households with a one-two punch of higher taxes and rising gas prices, but consumers seem to have shrugged off the hit to their wallets. Consumer spending rose at a 3.2% rate in the first quarter, the best pace since late 2010. Spending rose especially quickly in durable goods, longer-lasting items like cars and dishwashers, and another big jump in the construction sector provided further evidence that the housing market rebound is real. Imports rose too, which detracted from economic growth, but is another sign domestic demand is strong.
Businesses, less so. If the consumer sector gained momentum in the first quarter, businesses lost ground. Spending on equipment and software, a proxy for business investment, rose at a 3% pace, down sharply from 11.8% at the end of 2012. Investment in industrial and transportation equipment actually fell, as did spending on structures like stores and factories. One bright spot: Exports rose, a sign of strength amid a shaky global economy.
Government remains a drag. Falling public-sector spending continued to pull down growth, falling at a 4.1% rate, the ninth decline in the past ten quarters. The drop was concentrated in the federal government, in particular defense, where spending fell at an 11.5% rate. That followed a massive 22.1% pullback in defense spending in the fourth quarter.
Watch the trend. The first quarter’s 2.5% growth rate may have disappointed economists, but it still marks a reasonably healthy growth rate, especially compared to the end of 2012. Economists caution that 2013’s early strength was at least partly a rebound from the artificially low growth rate at the end of 2012 — businesses built inventories very slowly in the fourth quarter, then had to build them back up to start the year. But the slow fourth-quarter inventory number was itself a reaction to an unusually strong build-up in the fall. Average all three quarter together and the economy is growing at a 2% rate.
But worry about the future. The first quarter’s reasonably healthy growth was driven largely by the consumer sector. That could spell trouble going forward. After-tax income fell sharply in the first quarter, meaning consumers had to save less to spend more. That can’t continue forever, especially after the still-shaky job market slowed again in March. Falling gas prices and rising real estate and stock markets should help prop up consumers, but there are already signs that spending slowed in March.
