US Economic Growth Slows In Q1, But Annual Pace Quickens

U.S. economic growth slowed in the first quarter, the Bureau of Economic Analysis reports. Q1 GDP grew at an annual 2.2% rate in the first three months of 2012, considerably slower than the 3.0% increase in last year’s fourth quarter. The downshift will surely feed worries that the economy is struggling, particularly after the sharp drop in March durable goods orders and the modest upturn in recent weeks in new jobless claims. But today’s GDP report isn’t a smoking gun for arguing that a recession is imminent. Measured on a year-over-year basis, GDP growth accelerated, which suggests that the economy still has enough forward momentum to steer clear of a new downturn for the immediate future.


Let’s review the numbers by starting with the traditional measure of GDP: real (inflation-adjusted) quarterly changes. As the chart below shows, there’s been an obvious slowing of growth. As today’s government release explains, “the deceleration in real GDP in the first quarter primarily reflected a deceleration in private inventory investment and a downturn in nonresidential fixed investment that were partly offset by accelerations in [personal consumption expenditures] and in exports.” As a result, the pace of growth slowed for the first time in a year.

But it’s a different story when we look at the year-over-year percentage change in real GDP. As the second chart indicates, GDP’s annual pace increased moderately to 2.1% in this year’s Q1 vs. 1.6% in last year’s Q4.

That’s encouraging in the sense that it suggests that a new recession isn’t brewing, or so this data series implies. New recessions tend to be preceded/accompanied by slowing annual rates of GDP, which is clearly not the case in the latest numbers.
Nonetheless, this bit of good news comes with the usual caveats, starting with the possibility that today’s Q1 GDP number will be revised downward. Even if the Q1 data holds, that’s no assurance that Q2 is immune to trouble. But for the moment, it’s fair to say that today’s GDP update is a mixed bag for looking ahead.
“The U.S. economic expansion continues at a modest to moderate rate, with little momentum but should pick up somewhat later this year as business investment gets back on track,” advises Sal Guatieri, chief U.S. economist at BMO Capital Markets.
“Consumers are remarkably stable and steady,” notes Julia Coronado, chief economist for North America at BNP Paribas. “We’ll need to see final demand continue to improve. We’re still in muddling-along territory.”
Joel Naroff, chief economist at Naroff Economic Advisors, thinks that the economy will stay out of the cyclical ditch for the rest of the year. According to the L.A. Times, he expects 3% growth for 2012 overall. If so, that would be a substantial improvement over last year’s sluggish 1.7% increase.
“There’s nothing catastrophic happening, this is just slow growth and this underscores that the economy is on sound footing but nothing more,” opines Steven Baffico, chief executive at Four Wood Capital Partners.

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