U.S.: The Forward Spin from a Backward Glance at GDP
The Commerce Dept.'s advance look at first-quarter gross domestic product will provide the most concrete evidence that the economy has roared out of recession. The Apr. 26 report should show that first-quarter real GDP grew at an annual rate of about 4%. More importantly, the mix of growth means the economy will keep expanding at a healthy clip for the rest of 2002.
The exact top-line number for real GDP will depend largely on Commerce's estimates for still-unavailable data, such as March inventories and foreign trade. But given the reported monthly numbers on consumer spending, housing, and business investment, the first-quarter growth rate will probably be the fastest in nearly two years.
The breakdown should look like this: The consumer and inventory sectors contributed the most to growth last quarter (charts), with smaller gains in housing and business outlays for equipment. Foreign trade and nonresidential construction were negatives. How much the government added to growth could be a wild card. The federal government is spending on military operations and post-September 11 rebuilding, but state and local outlays are hampered by budget constraints.
Certainly, some special factors boosted first-quarter growth, probably at the expense of the second quarter's advance. First, the inventory swing is unlikely to be as great this quarter as it was in the previous period. And second, mild winter weather pulled some housing activity and consumer spending forward from the spring.
SECOND-QUARTER GROWTH is almost certain to slow, but the economy is in no danger of a double-dip. The supports under domestic demand are healthy, and the industrial sector is beginning to rebound. That sets the stage for a pickup in production to generate the bulk of real GDP growth in 2002, as those output gains generate additional jobs and income.
Importantly, the economy will continue to benefit from very accommodative monetary policy. Federal Reserve Chairman Alan Greenspan suggested on Apr. 17 that the Fed was in no hurry to lift interest rates until even more evidence of a solid recovery was in hand.
Greenspan also noted that inventories are "the driving force in the near-term outlook." That's because businesses can no longer fill orders from existing inventories as they did throughout 2001, when they slashed stockpiles at a record pace. Stock levels at all businesses fell by only 0.1% in both January and February, after an average monthly drop of 1% in the fourth quarter. Given GDP arithmetic, the slower rate of reduction added sharply to first-quarter growth, maybe by as much as 3 to 4 percentage points.
A further ebbing in the inventory drawdown is probably adding to GDP growth this quarter. And by the second half, companies will begin to build up their stockpiles in response to continued growth in demand by consumers and businesses.
Consumers, of course, have already done more than their share to pump up demand. Incentive-driven vehicle sales caused real consumer spending to jump at a 6.1% annual rate in the fourth quarter. In the wake of September 11 and job-market weakness, economists expected consumers to pull back sharply last quarter.
They didn't. Shoppers continued to spend on items other than cars. Real nonauto retail sales grew at a 10% clip last quarter, the fastest pace in over two years. That means first-quarter real consumer spending grew between 3% and 3.5%, adding 2 to 2.5 percentage points to GDP growth.
Don't expect consumers to keep up that pace in coming quarters. Less help from mortgage refinancings, tax cuts, and cheap energy mean that buying will depend on future income gains. Still, spending should be able to grow at least at a 2.5% rate this year. The uptrend in consumer spending puts a solid floor under real GDP growth. Where this year's growth rate ends up will depend on the strength of demand in other sectors.
BUSINESS INVESTMENT IN EQUIPMENT--which slumped badly in 2001--appears to have begun its turnaround last quarter. Rising shipments of capital goods suggest that the GDP numbers will show a small gain in equipment outlays. If so, it would be the first advance since the summer of 2000. That expectation is also supported by the jump in the production of high-tech equipment. Output of computers and related gear jumped at a 16.9% annual rate last quarter (chart).
Surging high-tech output, as well as a rise in auto production, is propelling the recovery in manufacturing. Industrial production posted gains in each month of the first quarter, something that hasn't happened since the spring of 2000, including a larger-than-expected 0.7% increase in March. But the gains go beyond just tech and cars. The Federal Reserve reported that 56.9% of industries bumped up production in February, the broadest gains in just under two years.
While equipment investment will begin to lift economic activity this year, don't expect much from business investment in new construction. Industrial capacity stands at a low 75.4%. The retail sector remains overbuilt, and the collapse of hundreds of dot-coms means an overhang of office space.
Residential construction, on the other hand, was a plus last quarter, thanks in part to mild temperatures in January and February. But in March, housing starts dropped 7.8%, to an annual rate of 1.65 million. Rising mortgage rates and a high level of homeownership in the U.S. suggest housing will contribute little, if any, additional economic growth for the rest of the year.
THE BIGGEST NEGATIVE for growth will be foreign trade. The trade deficit in February widened to $31.5 billion, from January's $28.2 billion, mainly reflecting a jump in nonoil imports. Since the first-quarter gap is well above the fourth-quarter average, net exports very likely subtracted between 1 and 2 percentage points from GDP growth last quarter. In coming quarters, a steady increase in domestic demand will mean a further rise in imports. But because of the strong dollar, U.S. exports, which picked up in February, won't grow as quickly as imports. That means the trade gap will continue to widen in coming months.
Last, government spending probably added to first-quarter growth, though its rise was less than the 10.2% gallop of the fourth quarter. For the rest of 2002, higher defense outlays and the return of federal deficit-spending suggest recent fiscal actions will be a plus for growth.
Wall Street often dismisses the GDP report as backward-looking. After all, when the first-quarter numbers come out, the second quarter will be a month old. But this rearview mirror will offer a glimpse as to what lies ahead. The report's data on the inventory upswing, resilient consumer demand, and a turnaround in capital spending will bolster the case for healthy and broad-based economic growth for the rest of 2002.
By James C. Cooper & Kathleen Madigan