First-quarter GDP growth in the US was a pathetic 0.6%, it
turns out. This is great news, says Justin
Lahart: it shows that companies were running down their inventories at the
beginning of the year, and so will be increasing their production substantially
for the rest of it.
The numbers are certainly consistent with this view. With consumer spending
rising at a 4.4% rate and business spending rising at a 2.9% rate in the quarter,
the main
drag on growth was in inventories.
Companies reduced stockpiles at a $4.5 billion rate last quarter compared
with initial estimates of a $14.8 billion gain at an annual rate. The figures
subtracted another percentage point from growth.
Certainly the wise men at the Fed seem to think that the
worst is now behind us:
The pace of economic expansion had slowed in the first part of this year,
but the recent sub-par performance probably exaggerated the weakness of underlying
demand, and the rate of economic growth was expected to pick up in coming
quarters. Meeting participants anticipated that real GDP would advance at
a pace a little below the economy’s trend rate of growth through the remainder
of this year and then pick up to a rate broadly in line with the economy’s
trend rate in 2008.
But when the consensus is that the only way to go is up, it’s worth paying
attention to the contrarians. Nouriel
Roubini reckons that second-quarter growth will also be less than 1%, for
instance, and says that the consumer growth propping up the Q1 figure is going
to fall substantially in Q2:
In Q1 private consumption grew at a whopping annual rate of 4.4%. In spite
of that – given the weakness of housing, net exports and inventories – GDP
growth was only 0.6%. Now move forward to Q2: we know that Q2 started on a
weak note for private consumption as April retail sales actually fell. Most
analysts are now expecting that consumption may grow in Q2 at an annual rate
of about 2% (down from the 4.4% in Q1). So, unless there is a massive recovery
of net exports, capital spending by the corporate sector, inventory rebuilding,
Q2 growth will remain in the growth recession range.
I guess the key question, as ever, is whether and how the US consumer is going
to be able to keep on spending. During the tech boom, we spent our paper profits
from the stock market. During the housing boom, we withdrew equity from our
properties. Where’s the money going to come from now? Credit cards? That stock-market
wealth effect (again)? Certainly it’s not going to come from savings.
I’m no economic forecaster, and if I was an economic forecaster I would –
like most economic forecasters – be more wrong than right. My rule of
thumb is simply to trust the market on such things, because the market is generally
more right than wrong. With the S&P 500 hitting all-time highs, I’m sanguine.