The Commerce Department reported Friday that the economy grew 2.5%, on an annualized basis, in the 1st Quarter of the year. Economists had been expecting a stronger performance, with the consensus estimate predicting 3% growth. The economy grew 0.4% in the 4th Quarter last year.
The growth was fueled by a bigger increase in personal consumption than was expected. Personal consumption grew 3.2% in the quarter, almost double the 1.8% growth in the fourth quarter. Consumer spending accounts for roughly 70% of the economy.
The growth in consumer spending doesn’t look sustainable. Personal income fell sharply in the quarter, falling 3.2% after a 8.1% gain in the fourth quarter. Disposable income dropped 4.4% after a 7.9% gain in the fourth quarter. This is likely do to some taxpayers shifting income to the fourth quarter last year, before higher tax rates took effect.
It is this forwarding of income that fueled much of the quarter’s consumer spending. Also fueling the spending was a big drop in personal savings. The personal savings rate dropped to 2.6%, from 4.7% in the fourth quarter. The drop in income in the quarter suggests a consumer pull back next quarter.
The other factor driving the 2.5% growth was a big rise in business inventories. This “stocking the shelf” component added 1.03% points to the GDP growth. If consumer spending pulls back, however, it will take longer to clear this inventory buildup.
The economy remains very weak. Numerous indicators over the past few weeks have pointed to a clear slowdown during March. The trend lines, especially the falling personal and disposable income suggest this slowdown will continue.