A Disappointing GDP Report: Underlying Weakness a Concern

Real GDP Grew at 2.5% Annual Rate in 1st-Quarter 2013

Apr 26 2013

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The Bureau of Economic Analysis (BEA) reported that real gross domestic product (GDP) grew at an annualized rate of 2.5% during the 1st-quarter 2013 following near zero growth of 0.4% in the 4th-quarter 2012. Over the past 4 quarters real GDP has increased by a meager 1.8%.

Since the end of the “Great Recession” in the 2nd-quarter 2009 real GDP has grown by a total of 8.3% or at an annualized rate of 2.1%. The current recovery continues to rank as the weakest post-World War II recovery in terms of real economic growth. The average total growth in real GDP over a comparable 15 quarters for other post-World War II recoveries was 17.8% or an annualized growth rate of 4.4%. Real GDP has increased by just over $1.0 trillion (2005$) since the end of the recession. This is less than half the nearly $2.3 trillion (2005$) that an average recovery would have produced putting the current recovery’s growth gap compared to average at $1.2 trillion (2005$).

The report was not only weak, but an artificially depressed report on 4th-quarter GDP had the effect of making growth during the current quarter look artificially “strong.” In his comments on the report, Chairman Brady noted, “ The bounce back in today’s report also reflects an artificially depressed fourth quarter report driven by a shift of defense spending from the fourth quarter into third quarter of 2012. Without that shift, today’s report would have shown real GDP increasing by only 1.9%.”

Real Defense Consumption for services during the first and second quarters averaged $195.5 billion (2005$). In the third quarter, those expenditures jumped to an annualized $216.5 billion (2005$) before declining to $174.3 billion (2005$) in the fourth quarter. Those two quarters was $195.4 billion (2005$). Eliminating this apparent timing shift would result in lowering third quarter 2012 real GDP by $21.1 billion (2005$) and raising fourth quarter 2012 GDP by a corresponding amount.


The increase in real GDP reflected positive contributions from personal consumption expenditures, private inventory investment, exports, residential and non-residential fixed investment that were offset by negative contributions from the government sector and an increase in imports.

Real personal consumption expenditures increased 3.2% in the first quarter, compared with an increase of 1.8% in the fourth. Many economists suggests this strong increase reflects consumer spending that resulted from individuals spending cash from the proceeds of asset sales before the end of 2012 to avoid higher tax rates in 2013.

Disappointingly, real nonresidential fixed investment, a key driver of private sector job growth, increased by just 2.1% in the first quarter, compared with an increase of 13.2% in the fourth. Nonresidential structures decreased 0.3%, in contrast to an increase of 16.7%. Equipment and software increased 3.0%, compared with an increase of 11.8%.

Real residential fixed investment increased 12.6%, compared with an increase of17.6%.

Real federal government decreased at an annual rate of 8.4% during the quarter compared to a decline of 14.8%. Real state and local government declined at a rate of 1.2% compared to a decline of 1.5% in the prior quarter.

In terms of contribution to the change in real GDP during the quarter:

Personal consumption expenditures added 2.24 percentage points, fixed nonresidential investment added 0.22 percentage points, and residential investment added 0.31 percentage points. The change in private inventory investment added 1.03 percentage points.

Net exports subtracted 0.5 percentage points. Also subtracting from the growth rate were federal government (0.65 percentage points) and state and local government (0.14 percentage points).

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