US GDP is not as dismal as it looks

The advance report of first quarter US GDP was stronger than it looked. It declined overall at a 6.1% annual rate, faster than expected. But consumption turned positive and inventories dropped sharply, while weak government spending – which won’t be a problem once stimulus dollars start circulating – depressed growth. Capital investment inevitably plummeted. But the figures suggest the economy may be nearing a bottom. Unfortunately, it may also stay there.

The advance estimate is normally substantially revised with new statistics, such as the inclusion of March trade figures, for the release of the “preliminary” estimate in May. Since trade globally rebounded in March, and other economic data has improved somewhat, it’s likely that the May figure will be less dire.

The most positive sign for future GDP trajectory was the $104bn decline in private business inventories, which accounted for 46% of the quarter’s GDP decline. Since personal consumption rose, the inventory overhang from previous quarters looks to have been corrected or even over-corrected, so flat or modestly increasing inventories should in future quarters boost reported GDP growth.

Capital investment plummeted by over 10% — a 38% annual rate — mostly due to the housing decline and the financial crisis. In recent weeks, financing spreads have eased and housing has shown signs of improvement, suggesting even this factor may bottom out soon.

Surprisingly, government spending declined in the quarter, a drop that accounted for 13% of GDP’s overall fall. This was presumably due to the change in administrations, and state and local belt-tightening efforts. Given the $779bn stimulus package, that should now reverse sharply.

The rate of economic decline was significantly lower than in the fourth quarter. However, a rapid recovery seems unlikely. The GDP deflator rose by 2.9%, indicating that inflation remains a threat. A resurgence would cause interest rates to rise, while there may also be “crowding out” of private capital investment from the unprecedented budget deficits. Combined, this would indefinitely delay true economic recovery.