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GDP report shows sluggish but healthy economy

by Matt Higgins
Apr 30, 2013


1Q 2013 U.S. GDP Growth Rate

U.S. Department of Commerce Bureau of Economic Analysis/Matt Higgins/MEDILL

After a modest growth rate of 0.4 percent in 2012's fourth quarter, GDP jumped to a 2.5 percent annual growth rate in the first quarter of this year, subject to revision in May.    

The gross domestic product quarterly report released Friday shows a sluggish but improved economy. Markets responded with a day that saw little change in value.

The advance estimate of real GDP expanded at a seasonally-adjusted annualized rate of 2.5 percent, according to the U.S. Department of Commerce, falling short of analysts’ expectations of 3 percent, but much improved over the previous quarter’s 0.4 percent growth. GDP measures the nation's total output of goods and services. The Commerce Department will release an adjusted first quarter report on May 30.

BBVA Compass, a financial services firm, estimated a first quarter GDP growth of 2.3 or 2.4 percent. “We are more pessimistic than the majority of analysts,” Kim Fraser, an economist at BBVA Compass, said. “Personal consumption and employment were strong in January and February, but slowed dramatically in March. Employment was down drastically,” she said.

The increase in the first quarter was due to rises in personal consumption, business inventory, equipment and software, and housing investment, according to the Commerce Department’s report.

“Consumption was stronger than expected, and housing was a strong mover,” Fraser said.

Imports increased, which resulted in a lower GDP, but economists like Fraser see an upside to this. “Imports may be an encouraging sign,” she said, referencing the fact that they indicate an increase in consumer spending.

Another factor responsible for lower than expected GDP growth was a decrease in spending by local, state and federal governments.

Most of the effects of sequestration, the drastic across the board cuts to federal spending, have yet to be felt in the economy, but defense spending declined 11.5 percent, which kept the first quarter GDP growth from reaching 3 percent, according to BMO Capital Markets Senior Economist Sal Guatieri. “Federal defense spending carved 0.6 percentage points from growth,” he wrote in a report.

Both Fraser and Guatieri believe the sequestration cuts will have more of an effect in the second quarter. Despite this, Guatieri predicted, “While sequestration will slow GDP in Q2, we still expect growth to top 3 percent in the second half of the year amid improved household finances, pent-up demand for autos, and the long-running housing market recovery.”

The Dow Jones Industrial Average closed at 14,712.55 on Friday, up .08 percent from Thursday.