GDP Growth: First Quarter 2005 Advance Estimate

This morning the BEA reported that its advance estimate of GDP growth in the beginning of 2005 came in somewhat below expectations, which were for about 3.5% growth:

Real gross domestic product — the output of goods and services produced by labor and property located in the United States — increased at an annual rate of 3.1 percent in the first quarter of 2005, according to advance estimates released by the Bureau of Economic Analysis.

…The deceleration in real GDP growth in the first quarter primarily reflected a deceleration in equipment and software, an acceleration in imports, and a deceleration in PCE that were partly offset by accelerations in private inventory investment and in exports.

…The price index for gross domestic purchases, which measures prices paid by U.S. residents, increased 3.0 percent in the first quarter, compared with an increase of 2.9 percent in the fourth.

This is not a very good report. In fact, I think it was pretty bad. Much of GDP growth in early 2005 was apparently driven simply by a massive build-up in inventories; over 1.2% of the 3.1% GDP growth rate was due to inventory growth. But obviously, GDP growth can not be sustained by inventory growth. Furthermore, such inventory growth suggests that businesses may need to rein in production a bit.

The time series for GDP growth and inflation over the past four years looks like this:

Much of the growth in GDP over the past couple of years has been driven by investment spending, both by businesses and on housing. But business spending slowed markedly in the beginning of 2005, and residential investment spending has been considerably cooler in the past 3 quarters compared to 2003 and early 2004:

Finally, notice the US’s continuing current account problem: imports, which are much larger than exports in the first place, continue to grow faster than exports. The effect of the weaker dollar on exports has yet to make itself felt:

All in all, a disappointing report. If the apparent slowdown in investment spending continues (and there’s no reason yet to think that businesses have picked up the pace of spending from the levels of early 2005), then GDP growth for the year may be less than 3%. That is not a horrible growth rate, but it is a bit disappointing to those who hoped for another year or two of strong economic growth in the US before this phase of the business cycle was over.