Q1 GDP Research Notes

by Jim Baird on May 31, 2012

Growth slips below 2% on mostly negative revisions

Having expected 2.5% growth, the street was disappointed last month with the first estimate of GDP growth of 2.2%.  Recent data on inventory building and capital investment dampened expectations further, and with good reason.  Today’s second look at GDP growth in the first quarter showed the economy grew at a 1.9% annualized pace, slower than initially thought but in line with revised expectations.

Improved personal consumption was the primary driver of growth, as unseasonably warm weather and better job market conditions boosted sentiment and paved the way for looser consumer purse strings.

A sharp slowdown in business investment and lower inventory building in the first quarter were drags on growth.  Although businesses continue to stockpile cash, the cloudy economic outlook has contributed to a high degree of corporate sensitivity to the risk of overinvesting.

Looking ahead, mediocre income growth, high unemployment, and an economy that is slowing once again pose headwinds to consumers.  Increasingly, it looks like it could be difficult for consumers to maintain their recent pace of spending growth without sacrificing savings. 

Even with confirmation that the economy expanded at a moderate pace in the first quarter, the recent resurgence in risks in the Eurozone, slowing global growth, and uncertainty around near-term fiscal and monetary policy create a window of risk for the economy.  For investors, that could translate to heightened volatility in the near-term, but could also in time create opportunities for long-term investors with a sufficiently high tolerance for risk.

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