Everyone was bracing for slow GDP growth in the first quarter of 2011, with several headwinds for the economy, including the Japan earthquake, Middle East unrest and higher gas prices. And that came to pass today.
The American economy slowed to a crawl in the first quarter, but economists are hopeful that the setback will be temporary.
Total output grew at an annual pace of 1.8 percent last quarter, the Commerce Department said Thursday, after having expanded at an annualized rate of 3.1 percent at the end of 2010. Most economists had forecast growth of 2 percent in the first quarter.
The slowdown was largely the result of a widening trade deficit, a larger decrease in federal government spending, and higher commodity prices, which reduced the amount of pocket money that households and businesses had available to spend.
“Consumers are spending more, but it’s getting soaked up in higher gas prices and higher food prices,” the chief economist at RDQ Economics, John Ryding, said. “That’s not leaving nearly as much left over for discretionary spending.”
I intentionally left out the bolded portion. The first quarter saw a pretty modest decrease in spending – $10 billion from two continuing resolutions while negotiations on 2011 appropriations continued. If that was enough of a factor to contribute to sending growth down, then the impact will be the same in the next two quarters. And the fourth quarter, on the 2012 budget, is grand bargain time. So there’s no quarter that won’t be affected by contractionary fiscal policy. And don’t forget the debt limit, a failure to increase with will play havoc with the financial system and economic growth as well.
That’s why this cover story about slow growth being a temporary condition is silly. Ben Bernanke previewed this line yesterday, saying that he hoped slow growth would be “transitory.” But what factors are slated to end? Maybe there won’t be another earthquake, and maybe the winter weather which some analysts actually blamed slow growth on will improve (tell that to Tuscaloosa and the folks along the Missouri River). But the Middle East isn’t getting well anytime soon. If that’s keeping gas prices high, along with the speculation that Bernanke didn’t want to dare mention yesterday, then those prices will stay right there, limiting consumer spending. And lawmakers in Washington are making a conscious choice toward austerity, which will have a definitive impact on economic growth. Not to mention that the Fed will wind down their Treasury-buying program at the end of Q2, and don’t plan anything on monetary policy for the economy. So explain to me how the Fed still expects 3.1-3.3% growth for the year, which would mean three straight quarters of numbers well above that?
Growth out of a recession is supposed to be sky-high. This homemade chart from Steve Benen is nice, but he knows that growth has sagged well below where a recovery should be for five straight quarters now. He even says it: “We can and must do much better than 1.8%, but we won’t if the nation pursues a conservative approach that focuses on one problem that doesn’t exist (inflation) rather than the problem that does exist (weak economic growth).”
How does this affect jobs? Job growth was actually above expectations for the quarter given this growth number. But realistically, you cannot expect to lower the unemployment rate without growth of 3% or higher. And as Paul Krugman noted yesterday, if you look at the employment-population ratio or other datum, you’ll see that job growth is totally stagnant. Which is in line with the stagnant growth in GDP.
Welcome to the recovery.