The economy grew at a 1.8% annualized pace in the 1st quarter of 2011, meaningfully slower than its 3.1% pace in the final quarter of 2010.
As the first estimate for the quarter, it is still subject to revisions that could result in meaningful adjustments. Nonetheless, all signs point to the economy clearly slipping in the last few months.
The drivers of the slowdown were diverse. Consumer spending and business investment grew, but at a slower pace. The housing component remains depressed. Even against the backdrop of improvement in the economy and low interest rates, spending on new homes continued to decline over the past year.
Growth for the quarter would have been slower if not for some inventory accumulation. While not a desirable source of growth over an extended period, a bit of re-stocking isn’t terribly concerning given the substantial drawdown in inventories in Q4.
Governmental spending at the federal, state, and local level were all negative. The push toward greater fiscal responsibility and deficit reduction is having a clear impact. Over the long-term, these fiscal imbalances must be reined in. In the near-term, the economy is certain to feel the impact as a drag on growth.
Yesterday, the Fed revised its estimate for 2011 GDP, trimming it to a range of 2.1% – 3.3%. Undoubtedly, consumers are cutting discretionary spending to compensate for rising food and energy prices. Chairman Bernanke made it clear that the Fed expects slow growth in the near term, with the pace of growth expanding in coming years. Our view is that the risk of recession in the near-term remains slim, but an extended period of slow growth isn’t likely to encourage an enthusiastic mood any time soon.
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