The first estimates of U.S. gross domestic product (GDP) for 2016 arrived this morning. The headline number: real GDP grew about 0.5% from January through March. That’s pretty slow, especially compared to the 2015 annual rate of 2.4 percent.
The picture above shows real GDP relative to its potential. Potential GDP measures the amount of final goods and services the US economy could produce if employment, capital utilization, and productivity grow at their usual rates. Notice that the blue line (real GDP) is crawling back towards the red line (potential GDP).
In plain English, the economy is s_l_o_w_l_y recovering from the 2008-2009 financial crisis. This is a different story than that told by the labor market, where unemployment has fallen to a quite-low level of 5 percent, roughly back to where it was in 2008. These two facts together imply that productivity growth, that is, the growth of the amount of output each worker produces, is quite low.
We can also measure GDP either as spending or income, and by looking at each we can tease out what happened in the first quarter of the year.
Let’s start with spending. We can use the standard categories of C (consumption spending, i.e. spending by households), I (investment spending, i.e. spending by businesses), G (government spending), and NX (net exports, i.e. the difference between exports and imports) to analyze what happened.
- C grew at 1.9 percent, a decline from 2.4 percent in the last quarter of 2015. Declining sales of motor vehicles accounted for all of this fall. This might indicate trouble ahead for Ford, GM, Toyota, and other auto manufacturers and their suppliers.
- I fell 3.5 percent. The details are interesting:
- Nonresidential fixed investment shrank 5.9 percent, with business construction spending falling 10.7 percent and equipment investment declining 8.6%. According to James Hamilton at Econbrowser, most of this is due to collapsing spending in the oil industry.
- Residential construction continued to grow smartly, with a 14.8 percent increase following a 10.1 percent rise last quarter and 8.2 percent the quarter before that. That should help employment growth in construction.
- Manufacturers are worried about the future, as they continued to draw down their inventories for the third straight quarter.
- G rose 1.2 percent. The growth was entirely due to capital spending by state and local governments; the federal government continued to shrink, especially non-capital defense expenditures.
- Exports fell 2.6 percent while imports barely budged (a 0.2 percent increase.) This isn’t surprising as demand for US products is weakening abroad due to the rising value of the dollar and slower growth in Europe and Asia.
On the income side, one number jumps out: a 12.6% decline in nominal farm income. Given that inflation is low that’s close to its real value and is a big shock for a single quarter. This is not a good sign for rural areas as farm incomes tend to drive non-farm incomes in those regions. In particular, the Minnesota legislature should keep this in mind before they enact any permanent tax cuts or spending increases as the projected state budget surplus could dry up quickly if this trend continues.
All in all this is a sobering report. The good news is that this is the first of three estimates made by the Bureau of Economic Analysis, and the numbers usually increase with each revision. The bad news is that even after the revisions the message will be the same: the US economy is growing, but only very, very slowly.