Consumers Lead the Way on 1Q2010 GDP Growth

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Real gross domestic product (GDP) increased at a seasonally adjusted and annualized rate of 3.2 percent 1Q2010 (relative to 4Q2009), according to the "advance" estimate released by the Bureau of Economic Analysis. While still well in positive territory, growth during 1Q2010 was considerably slower than 4Q2009’s 5.6 percent.

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The 1Q2010 increase reflected positive contributions from personal consumption expenditures (PCE) – which increased at the fastest pace in three years – and private domestic investment (PDI). But the rate of was slower than in 4Q2009 primarily because of decelerations in private inventory investment (part of PDI) and in exports (part of NetX); a downturn in residential fixed investment (part of PDI), and a larger decrease in state and local government spending (GCE) also slowed growth.

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Interestingly, consumer spending continues to drive the U.S. economy despite supposed deleveraging by consumers. In fact, the proportion of total GDP represented by PCE is homing in on the record of 71.3 percent set in 3Q2009. How can consumers be carrying such a large proportion of economic activity in the face of high unemployment and other difficulties? As we hypothesized in our April 19 blog entry Retail Sales Increased in March: The Question is “Why?” one possibility is that some homeowners are engaging in “strategic” defaults whereby they forego mortgage payments and purchase “stuff” with the money they should be paying for housing. A more likely possibility is that government transfer payments are the enabling mechanism. Stay tuned for future posts that will discuss personal income and outlays.

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The behavior of residential fixed investment (RFI) as a percentage of GDP is of great concern to us. RFI typically hit bottom and then bounced back rather quickly during past recessions. Not this time, however. Not only is RFI’s contribution to GDP at a record low, it also shows no sign of turning upward; its sideways move suggests that a robust recovery is not in the cards for 2010.