Sunday, May 1, 2011

US Q1 Growth

US Q1 2011 GDP came in slightly stronger than our pre-release estimate. Recall following the release of some of the March quarter partial activity data, we had revised our GDP pick down from a seasonally adjusted annual rate (saar) of 2.5% to 1.5%. The data printed at 1.8%.


The slowdown from the Q4 2010 GDP increase of 3.1% was due to the significant increase in energy prices, bad weather, and a decline in government spending. These factors should prove to be at least partly temporary.

While higher energy prices was largely responsible for the slowdown in consumption from a saar of 4.0% in Q4 2010 to 2.7% in Q1 2011, this was not as marked as monthly retail sales data had suggested. Having said that, monthly personal spending figures tells us that real spending was losing momentum over the quarter. After rising 0.5% in February, real spending rose just 0.2% in March.

The recent rapid increase in prices has absorbed much of the increase in disposable income that came with the cut in payroll taxes that took effect on January 1st. Nominal disposable income rose 6.8% over the quarter, but only 2.9% in real terms. For the month of March, nominal incomes rose 0.5%, but real disposable income rose only 0.1%.

Business investment rose a saar of 1.8% over the quarter, held down largely by a weather related 2.1% decline in non-residential building. Weather was also likely to have had a hand in the 4.1% decline in residential construction over the quarter. On a more pleasing note, investment in equipment and software posted a solid 11.6% gain.

Net exports were roughly neutral which was better than I was expecting. Exports were up 4.9% while imports rose 4.4%.

Government spending contracted a saar of 5.2% over the quarter, largely due to an 11.7% drop in defence spending which is expected to at least partially reverse next quarter. However the 3.3% decline in state and local government spending is reflective of the hard work going into reining in budget deficts at this level of government. This is likely to be an ongoing feature for some time. In time, significant and long-term reductions in Federal government spending will provide a drag on growth.

As I said a week ago when I was previewing this result, I'm mildly regretting the fact I revised my full-year 2011 US GDP forecast up to 3.0% from 2.5% previously. 3.0% looks to be a stretch, but I'll leave the forecast there for the meantime, but signal the risks are biased to the downside. And by the way, I'm even more convinced that monetary policy remains unchanged this year.