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GDP Miss May Be High Point for Economy in 2012

GDP Miss May Be High Point for Economy in 2012

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This morning, the government reported that GDP in the 1st Quarter grew by just 2.2%, a sharp drop from the 3% growth registered in the 4th Quarter last year. Analysts had expected growth of at least 2.5%, raising fears that whatever economic recovery existed is stalling. A deeper look at some of the numbers confirms these fears. 

The bright spot in the report, and the component that is contributing the most to economic growth, was personal consumption:

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Real personal consumption expenditures increased 2.9 percent in the first quarter, compared with an increase of 2.1 percent in the fourth.

Without this burst in consumer spending, on autos, non-durable goods and personal services, the GDP growth would have fallen even further. And there are three ominous signs in the report that suggest this consumption can’t be sustained.

First, the prices consumers pay for good spiked dramatically:

The price index for gross domestic purchases, which measures prices paid by U.S. residents, increased 2.4 percent in the first quarter, compared with an increase of 1.1 percent in the fourth.

Even factoring out food and energy, prices rose by 2.2%. 

Second, real disposable income growth almost ground to a halt, rising just 0.4%. In the 4th Quarter disposable income had increased 1.7%, likely contributing to the jump in spending in today’s report. 

More ominously, perhaps, personal savings took a nose dive, dropping from over $530 billion in the 4th Quarter to just over $460 billion in the first. The savings rate fell to 3.9% from 4.5%. 

Falling incomes, reduced savings and higher prices are not pillars on which to build economic recovery. 

Throughout the first quarter, consumers heard lots of happy-talk from the media about how the economy was picking up steam. Americans are eternally optimistic about the future and believed much of it. When the dust finally settled though, their incomes had basically stagnated and they’d blown through a lot of savings keeping up with higher prices. 

As the hangover sets in, expect a consumer pull-back in the 2nd Quarter. 


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