All Signs Point in the Wrong Direction
U.S. economic growth estimates released today for the first quarter of 2008 show that all parts of our economy experienced slower growth compared to the previous quarter, even exports, which is especially troubling given the overall weak performance of all other sectors.
The Department of Commerce’s Bureau of Economic Analysis’s advance estimates for economic growth in the first quarter reported an anemic annualized growth rate of 0.6 percent—the very same low growth rate in the fourth quarter of 2007. Consumption, investment, government spending, and trade all put in performances that were weaker than they had been in years.
Let’s start with consumer spending, which is the largest part of the U.S. economy. According to today’s figures, consumers increased their spending by 1.0 percent in the first quarter of this year. This is the slowest growth rate of consumer spending since the second quarter of 2001, when the economy was in the midst of the last recession.
In particular, spending on consumer durables—such as cars and refrigerators—took a dive, dropping 6.1 percent. This was the largest drop since the fourth quarter of 2005. Before then, the last time consumer spending on durables dropped this much was in the second quarter of 2000—before the signs of the last recession became apparent.
On the investment side, we see weaknesses among consumers emerging again. In particular, spending on new homes and renovations dropped by another 26.7 percent. This decline surpassed all of the quarterly decreases over the previous eight quarters, making this the ninth quarter in a row of lower spending in this area. To put this in perspective, this has been the longest continuous slide in residential real estate since the late 1950s.
Business investment also turned downward. This is particularly troubling since business spending, especially on offices, factories, and mine shafts, helped to prop up the growth rate in recent years as consumers ran out of steam. For the first time in more than a year—since the fourth quarter of 2006 to be exact—business spending declined on structures (such as office buildings, factories, and hotels) and on equipment (such as machinery, computers, and software). With a drop of 2.5 percent, this was also the largest decline in business investment spending since the first quarter of 2004.
Moreover, last quarter’s decline followed several quarters of healthy increases. This reversal in the trend came about as businesses spent 6.2 percent less on structures—the first time this part of the economy has fallen since the third quarter of 2005. These figures clearly indicate that the weakness that started with the consumer has now spread beyond the consumer.
In a similar vein, governments have less money to spend and it shows. State and local government expenditures, which are influenced at least in part by property tax receipts, rose by only 0.5 percent, the lowest increase since the third quarter of 2005. Non-inflation adjusted property tax receipts have grown by less than 1.4 percent in each of the past two quarters, the smallest increases since the third quarter of 2005.
The weakness in spending by state and local governments could not even be overcome by a surge in federal government spending. The federal government increased its expenditures by 4.6 percent in the first quarter. Still, total government spending only rose by 2.0 percent in the first quarter of this year, the same as in the last quarter of 2007.
This leaves one last leaf to turn: trade. For a number of years now, the United States has enjoyed somewhat of an export boom, propelled by the lower dollar and strong demand overseas. In the first quarter of this year, though, export growth sank to 5.5 percent, down from 6.5 percent in the previous quarter, marking the second quarterly decline in a row. This may reflect a spillover effect from the slowing U.S. economy to the rest of the world as demand for foreign-made products in the United States, outside of oil, has declined and thus slowed economic growth overseas.
Imports have actually increased, largely carried forward by sharply higher demand for oil and petroleum products. Import growth accelerated to 2.5 percent, after imports actually fell in the fourth quarter of 2007. Much of this import increase came in the form of more petroleum imports. In inflation-adjusted terms, petroleum imports stood at the highest level since the fourth quarter of 2007 after increasing by 5.6 percent last quarter. In comparison, non-petroleum goods actually fell by 0.7 percent at the same time.
In sum, this means the trade deficit grew again. In the first quarter of this year, the trade deficit stood at 5.2 percent of GDP, up from 5.0 percent in the previous quarter, marking the second quarterly increase in a row and the highest level since the first quarter of 2007. This is especially troublesome since trade deficits should actually shrink in the middle of an economic slowdown as demand for imports falls. That this is not the case is a reflection of substantially more petroleum imports.
The U.S. economy may not officially be in a recession, but the current slowdown is nevertheless worrisome. All parts of the economy have weakened substantially over the past years and in some cases dropped to growth rates not seen in several years. Today’s data clearly demonstrates that the financial and economic weaknesses borne by consumers following the implosion of the housing and mortgage boom has now taken hold in other sectors of the economy, particularly among state and local governments, business investment, and exports and imports. This does not bode well for the U.S. economy going forward this year.
Christian E. Weller is a Senior Fellow at the Center for American Progress, and Associate Professor, Department of Public Policy and Public Affairs, University of Massachusetts Boston
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