Friday, April 30, 2010

GDP Grows 3.2% In Q1 – Consumers and Inventory Accumulation Drive Expansion

Growth in GDP for the first quarter came in at 3.2% annualized. This was the third consecutive quarter of growth and followed a jump of 5.6% in the fourth quarter of last year.

As was the case in the fourth quarter, much of the expansion was due to firms increased investment in inventories. Inventory growth accounted for 1.6 points of the expansion following a contribution of 3.8 points in the fourth quarter. Though inventory expansion does create aggregate demand just as any other portion of GDP, it is largely temporary as firms readjust themselves. Real final sales, which excludes changes in inventory and therefore gives a better picture of current sales demand, grew by a lesser 1.6% annualized. This followed an expansion of 1.8% in the fourth quarter. Though this is indeed improvement coming out of recession, this is only modest demand growth and without a stronger number moving forward, the economy will fail to produce strong payroll expansion.

Where the first quarter did show some solid expansion was in consumption growth, which grew at a pace of 3.6% annualized. This was the fastest growth rate since before the recession began. Weakness in the GDP numbers came from non-consumption components. Residential investment was again a drag on growth, reducing GDP growth by 0.3% . Net exports also held the rate back by 0.6% as imports grew faster than exports. Finally, as local and state governments have begun to trim back and the effects of the stimulus package are wearing off, the decline in direct government expenditures took 0.6% off of growth.

10.04.30 (Source: Bureau of Economic Analysis)

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