Friday, April 27, 2012

The public-to-private sector handoff attempt continues

The advance Q1 2012 GDP estimate was released today, coming in at +2.2% vs +2.5% consensus vs +3.0% prior. Two emerging trends of recent quarters, strong PCE growth and worsening government expenditure contraction, continued in Q1 to be the engines for the overall output growth.

Household consumption, coming in at a +2.9% clip, was very strong, particularly in durable goods demand, where motor vehicles & parts consumption growth highlighted the ongoing auto recovery story. The big question going forward is whether, given meager income growth, household consumption can be sustained or if the recent attempt at household releveraging will be stopped in its tracks and take consumption growth down with it.

Investment was rather meager, contributing about a third as much to GDP growth as in Q4. A reduced impact from inventories and the first decline in nonresidential investment since Q4 2010 weighed on GPDI. The contraction in structures investment accelerated, but even more alarming is the continued deceleration in equipment & software investment, which had its worst print since Q2 2009. Residential investment was a major bright spot, with the SAAR accelerating to 19.1% in Q1.

Government expenditure continues to be the major drag on output in the US, with its sixth consecutive quarterly contraction in Q1. Both federal and state & local spending contracted, highlighting a pattern that is likely here to stay for the foreseeable future. The federal deficit reduction contingency in Washington has the ball in its court and with a breach of the debt ceiling potentially due by the end of the year (in an election year no less), the prospect of a fiscal drag is very real.

Net exports contributed virtually nothing net net to output in Q1, as an increase in services exports offset an increase in services imports. The difficulty with decoupling from externally weakening growth prospects is that it can translate into a larger current account deficit, so this will be an important component to watch going forward if the US/ROW growth divergence persists.

Source: BEA


  1. Hi Naufal,

    Looks like you've figured out the graphing nicely. Something that sticks out to me, and I'll probably do a blog post on it tomorrow -- look at the contribution of services in consumption. That may be the major point of weakness in consumption growth; the level of investment, contrastingly, remains the biggest detractor from the GDP level.

    - Evan Soltas

  2. Yo Evan,

    Thanks, all thanks to you that I learned about the interactive Google charts.

    Look forward to your post. I agree very much with your assessment of investment (and its volatility) as being the focus of this and other slowdowns. I'm still skeptical of the rebound (if one can call it that) in residential real estate investment. 10% of new mortgages in the last two years (and 7.5% of new mortgages in the last four months) are already underwater. This, of course, in a ZIRP environment with plunging mortgage rates. So it's not just an issue of people not having access to credit due to legacy-driven impaired creditworthiness; household capital structure problems very much remain. And the slowdown in equipment & software investment bodes even more poorly for corporate releveraging (and the consequent rise in incomes and income-driven reduction in household liability/disposable income ratios).