Washington Post | Saturday, May 1, 2010
The slow-motion economic recovery has continued in the early months of 2010, according to new data that both affirm that an expansion is solidly in place and underscore that it is likely to remain sluggish. Gross domestic product, the broadest measure of economic activity, rose at a 3.2 percent annual rate in the first three months of the year, the government said Friday. That was the third straight quarter of increase, driven by a rise in spending by American consumers and increased business investment. The stock market fell sharply on Friday, with the ‘Standard & Poor’s’ 500 index down 1.7 percent on the weaker-than-expected GDP report and continuing uncertainty surrounding a potential bailout for Greece.
The details of the GDP report paint a picture of an economic recovery that is well underway and a nation that is unlikely to slide back into recession in 2010. Personal consumption increased at a pace of 3.6 percent, while investment in business equipment and software rose at a 13.4 percent rate. Those gains bode well in that they show both consumers and corporate America starting to loosen their purse strings. "Put together the rise in consumer spending and what is happening on the corporate side, and we’re starting to make the transition from a government-driven expansion to a private-sector recovery," said Robert Dye, senior economist at PNC Financial Services Group. "That’s a very important transition for us to make over the next few months."
Friday’s data showed the limits of that expansion, however, and gave some reasons to be concerned about its sustainability. A rise in business inventories — companies increased the value of goods on their warehouse and store shelves by $31 billion in the quarter — contributed 1.6 percentage points to growth but is likely to
produce only small gains as the year progresses. Meanwhile, the job market is recovering at such a glacial pace that rising consumer spending has come not from higher incomes but from a diminished savings rate. The expansion could soon lose steam if incomes don’t start rising. "That kind of growth in spending is not sustainable given what we’re seeing in labor markets," said Heather Boushey, a senior economist at the Center for American Progress.
Federal government spending is contributing to growth, but state and local governments are now a drain on the overall economy as they slash their budgets amid falling tax revenue. Their spending fell at a 3.8 percent annual rate and forecasters expect the trend of tightening state and local budgets to continue. A final negative sign for the remainder of the year is that trade is now acting as a mild drain on economic growth. Exports and imports climbed in the first quarter, as global trade continues to bounce back from its lows during the financial crisis, but imports rose faster, such that net exports drained about 0.6 percentage point from GDP growth. There is reason to think that trend — imports rising faster than exports — will continue as major U.S. trading partners in Europe are ailing and as the dollar has risen in recent weeks against the euro and other major currencies.
Analysts expect the economy to continue expanding through 2010 at a rate similar to that of the first quarter. Even if they’re right, and overall growth for the year is in the 3 to 4 percent range, it wouldn’t be enough to dent the 9.7 percent unemployment rate in a major way. Using a rule of thumb known as Okun’s Law, if the GDP were to grow 3.5 percent in 2010, it would only be enough to drive the unemployment rate down by about half a percentage point (the actual result can vary significantly depending on productivity growth and other factors). Other potential drags on the economy this year are residential and commercial real estate. In the first quarter, both declined, with residential investment falling at a 10.9 percent rate and investment in business structures dropping at a 14 percent rate.