1Q2013 Gross Domestic Product: Second (Preliminary) Estimate

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The Bureau of Economic Analysis (BEA) estimated 1Q2013 growth in real U.S. gross domestic product (GDP) at a seasonally adjusted and annualized rate of +2.4 percent, 0.1 percentage point lower than the previous (advance) 1Q estimate (and MarketWatch’s expectations). This growth rate was 2.0 percentage points higher than the 4Q2012 estimate. Personal consumption expenditures (PCE) and private domestic investment (PDI) added to 1Q growth, in that order; government consumption expenditures (GCE) and net exports (NetX) dragged on growth. 

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"When looked at as a whole, the U.S. economy continues to meander along a path of slow and uneven growth," said Richard Moody, chief economist of Regions Financial Corp. “If one wants to pick a single reason for decline of GDP between the advance and second estimate,” Global Economic Intersection’s Steven Hansen added, “it is [the] lower inventory buildup.”

Normally among the first to cast aspersions on the GDP report, the analysts at Consumer Metrics Institute (CMI) were unusually upbeat. “[O]n the surface a 2.38 percent annualized growth rate at nearly full four years into a recovery is good news,” CMI wrote, “and a growth rate that many other global economies would currently be pleased to be reporting.” They pointed out several reasons for optimism:

• Consumer spending was sustained in spite of tax increases (although ZeroHedge -- legitimately, in our opinion -- opined that “perhaps it is about time to ask the question of how consumption in the ‘sequester’ and tax-hike quarter was the highest since 4Q2010”).
• Fixed investments continued to grow (although at a slower pace than in the prior quarter).
• Exports were still growing (slightly) after the prior quarter's of contraction.

Nonetheless, CMI observed one overriding issue suggesting reason for caution:

“Real per capita disposable incomes took a major hit, and it would appear that consumers had to dip into savings to sustain spending levels in the face of the January increase in FICA taxes. The astonishing annualized contraction of real per capita disposable income bears repeating: -9.03 percent -- 1½ percent worse than the -7.52 percent contraction rate recorded in 1Q2009 (the worst quarterly contraction recorded during the official duration of the "Great Recession").

“The contraction in real per capita disposable income caused the savings rate to plunge to 2.3 percent. This is the lowest savings rate since the 3Q2007. Which begs the question: Is it 2007 once again and consumers are leveraging up once more in joyous optimism (as the equity markets seem to assume)? Or, are households dipping into savings (and de facto leveraging up) out of necessity to offset the "new" FICA rate increase of 2 percent (by reducing their savings rate by -2.4 percent relative to 4Q2012)?

“Our view is that the household savings rate is a short term shock absorber for household budgets that can require a quarter or more to adjust to the realities of new taxes or falling incomes. Ultimately, however, households adjust to the new realities by tightening their spending. In this case we would be shocked if spending does not soften during the balance on 2013.”

The foregoing comments represent the general economic views and analysis of Delphi Advisors, and are provided solely for the purpose of information, instruction and discourse. They do not constitute a solicitation or recommendation regarding any investment.