Gross Domestic Product is a measure of the nation’s economic activity. The statistic measures the sum of the nation’s production for both the private and public sectors. A nation with an increasing GDP in real terms is considered to be growing, while one with a declining GDP in real terms is in recession. (NOTE: By Real economists mean adjusted for inflation and population).
The Federal government’s initial assessment of GDP for the first quarter of 2013 showed that the output of goods and services produced in the United States increased at an annual rate of 2.5 percent from the fourth quarter of 2012. In the fourth quarter, real GDP increased 0.4 percent. This first quarter “advance estimate” is based on generally incomplete data and is subject to revision. Even though GDP is a measurement of the economy’s production, the BEA calculates it by measuring consumption (which in the long run equals production). In this estimate the BEA reported that nearly all of the increase in the 1st quarter was the result of personal consumption expenditures, including very large increases for household services. In addition, growth was driven by changes in inventories. The largest year over year percentage increase was in spending for housing, something that various real estate statistics had been telegraphing for some time.
While these GDP numbers are better than we had expected for the first quarter, the relative lack of new investment still continues to be a drag on future economic activity. More importantly than that, the BEA reported an actual decline in personal income – with most of that being driven by lower investment returns. This will continue to be a drag on investment since the current low interest rate environment discourages savings (which equals investment over the long term).
Overall, the savings rate fell dramatically – from 4.7 to 2.6 percent of personal income – suggesting that the growth in consumer spending and therefore the measured GDP growth was driven by dissaving, something which is neither good for the economy or sustainable.
These factors suggest that future GDP growth will be more muted than we has expected last year. We had forecast zero or even a negative change in GDP for the first quarter with the economy beginning to strengthen through 2013. This is now in doubt as consumers will again need to retrench, and businesses continue to keep a lid on investing in new plant and equipment.