GDP Data Show Policymakers Still Have Work To Do

Consumers Alone Can’t Carry the Load

This article was originally published on MarketWatch.

The Bureau of Economic Analysis released its estimates of gross domestic product growth for the first quarter of 2012 earlier today. The data suggest that consumer spending on goods, services, and housing primarily carried economic growth, while businesses pulled back their investments.

The takeaway from today’s numbers is that policy makers still have work to do. Even though the economy continues to grow, consumers can’t maintain that growth on their own, and the growth we’re seeing isn’t strong enough to quickly bring down the unemployment rate. Congress should focus on addressing sluggish business investment, keeping up consumer demand, and supporting our middle class who are still recovering from the hammering they took during the Great Recession.

The data show that the economy continues a slow recovery. Today’s estimates show an annualized GDP growth rate of 2.2% for the first quarter of 2012, down from 3% in the fourth quarter of 2011. This marks the 11th quarter in a row of economic expansion. The economy now is $861.1 billion (in 2005 dollars) or 6.8% larger than at the end of the Great Recession in June 2009. And the economy is $176.4 billion (in 2005 dollars) or 1.3% larger than at the start of the Great Recession in December 2007, when the economy started to go into a tailspin. 

We’re clearly on the right path, having recovered the massive output losses that occurred during the 18 months of the Great Recession.

But more work needs to be done. The current economic growth rate will only gradually reduce the unemployment rate and abate the economic pain that America’s middle class has been suffering from for the past few years.

That said, a number of factors are moving on the right track. Most noteworthy is the accelerated expansion of U.S. exports, which grew by 5.4% in the first quarter up from 2.7% in the fourth quarter of 2011 and the fastest export growth rate in a year. Manufactured goods exports saw large jumps, with computers and peripherals up 37.3% and cars and car parts up 36.8%. These exports accounted for more than half of the U.S. export growth in the first quarter of 2012.

The data illustrate the continued competitiveness of U.S. products in global markets since the global economy was roiled by worries about a continuing crisis in Europe and slowing Chinese growth, both of which should have translated into slower demand for U.S. products overseas.

Consumer spending on goods, services, and housing is an additional bright spot. This spending accounted for all of the economic growth in the first quarter and was sufficient to offset declining spending elsewhere, such as less government spending.

Consumption of goods and services increased by 2.9% in the first quarter of this year, up from 2.1% in the fourth quarter 2011 and the fastest growth rate in more than a year. Spending on new cars grew particularly strongly with an increase of 28.7% in the first quarter of 2012. And spending on new homes increased by 19.1% in the first quarter of 2012, up from 11.6% in the fourth quarter of 2011 and the fastest expansion since the second quarter of 2010.

The consumer spending data, though, highlight the need for continued policy attention to make sure that consumer demand stays strong. Consumers managed to increase their spending in large part by reducing their already-low saving rate to 3.9% of after-tax income in the first quarter of 2012, down from 4.5% in the fourth quarter of 2011 and well below its last peak of 5.6% in the third quarter of 2010. And spending on new residential real estate is still $174 billion (in 2005 dollars) less than at the start of the recession in December 2007. The housing market needs many more quarters to recover its strength.

We need to keep a watchful eye on consumer spending in the coming months. Low consumer spending could mean fewer incentives for businesses to invest, since they can satisfy low and slow-growing demand with their existing plants and equipment.

A decline in business spending weighs on the economy in the first quarter, causing gross domestic product to rise at a lower-than-expected 2.2% rate and firing up worries about the recovery.

Business investment already proved a drag on economic growth in the first quarter of 2012 largely due to a pullback in mining, but also because of less spending on office buildings and health-care facilities, and slow gains in equipment investment.

Business spending on commercial structures fell by 12% in the first quarter of 2012 after declining 0.9% in the fourth quarter of 2011. The accelerated decline in commercial construction is largely a result of falling investment in mining exploration, shafts, and wells, where spending dropped by 24.3% in the first quarter after decreasing by 18.7% in the previous three-month period. This seems a logical correction following a mining boom since the end of 2009.

Other decreases in business investment are more worrisome. For instance, offices and health-care facilities spending fell by 3.8% in the first quarter of this year after dropping by 13.5% in the prior quarter. Similarly, business spending on equipment — computers, trucks, and machinery — grew at a slow rate of only 1.7%, including a drop of 16.2% in spending on computers and software and a drop of 11.6% on industrial equipment.

Businesses may have decided that they have all of the buildings and equipment they need to satisfy the slow-growing consumer demand. But slow business investment growth means fewer sales for U.S. companies, less construction, and ultimately slower job growth.

Declining government spending adds to concerns about the private sector’s performance. Federal government spending fell by 5.6% and state and local government spending dropped by 1.2% in the first quarter of 2012. Government spending has now fallen six quarters in a row, putting more pressure on the private sector to pull the economy and the job market forward.

The trouble spots in the private sector, especially struggling consumers and lackluster investment performance, deserve continued policy attention, including supporting America’s middle class and investing in our crumbling infrastructure. The worst thing we could do right now is slash vital programs for households and consumers who need them most to shower even more tax giveaways on those who need them the least.

Dr. Christian E. Weller is a Senior Fellow at the Center for American Progress and an associate professor of public policy at the University of Massachusetts Boston.

This article was originally published on MarketWatch.