Not Running on Empty

Story Highlights:

• The BEA showed preliminary Q1 2011 GDP results rose 1.8%—a deceleration from Q4 2010’s 3.1% rate.
• The US economy is out of recession, done with recovery, and well into expansion.
• Deceleration was driven by rising imports and slowing government spending, but these are not necessarily negatives for the economy.
• It’s perfectly normal for growth speeds to vary—even greatly—in a growth cycle, such as the one we are solidly in now.

On Thursday, the Bureau of Economic Analysis (BEA) published preliminary US Q1 GDP.Expectations were for 2.0% growth, but the estimate was 1.8%. Since Q4 2010’s GDP growth was 3.1%, does this portend a stalling recovery? Probably not. To be specific, US GDP (whether inflation adjusted or not) has surpassed the previous peak, so we’re out of recession, done with recovery, and well into expansion.

Though GDP decelerated, very frequently, people mistake a slower rate with an actual decline. This isn’t just semantics—a slower rate of growth is still, in fact, growth. (An imperfect yet instructional example: No police officer is going to buy your story if you tell him, “I accelerated fast to 90 mphto get on the highway, but I’ve been slowing down ever since to reach 85 mph.”)

Q1’s slower growth (relative to Q4) is primarily attributable to a sharp upturn in imports and a large decrease in federal government spending—and possibly a bit of bad winter weather to boot. But a rise in imports isn’t a bad thing. Across developed countries, a better indicator to watch is aggregate trade levels, not net imports. The rise in imports in Q1 simply reflects US consumer spending resilience.

Likewise, government spending cuts stemmed primarily from defense—which is likely transitory and local. Further, a fall in government spending from budget tightening measures across the country, as well as receding fiscal stimulus, isn’t necessarily bad or unexpected. Since we are well past recovery and into growth, we don’t mourn a lack of government spending. As for the weather, well, it happens. Weather-related slowdowns can push some economic activity forward to some future time rather than cancel it entirely.

Most important, it’s not surprising to see economic activity slow or speed up from quarter to quarter. These things happen when measuring complex activity over arbitrarilydefined periods of time. It’s perfectly fine and normal for growth rates to vary—even greatly—in a typical growth cycle.

Other good news—broad inflation was below expectations, suggesting higher commodity costs (e.g., oil, food) have been less of a drag than is generally feared. Overall, prices remained moderate. Despite a slower growth rate, consumer spending beat expectations—further evidence of underlying economic strength. And private inventory investment and business investment both grew in Q1, which should provide further fuel for the economy going forward. That said, no economy is ever without challenges—and indeed unemployment remains high (though labor markets seem to be improving overall). But growth drives employment gains, not the other way around. In all, preliminary Q1 GDP figures painted a picture of an economy growing at a reasonable pace, with no real reason to suspect the gas tank has run dry.