After virtually stalling out late last year, the economy rebounded nicely in the first quarter of the year, growing at a revised 2.4% annualized pace, a result only fractionally lower than April’s advance estimate.
The consumer sector was the primary driver for growth during the quarter. Improving consumer confidence appears to have emboldened households to spend a bit more freely. Rising home prices and pent up demand for housing continues to power the recovery in real estate. That demand continues to drive double-digit gains in residential construction, which rose 12.1% in the first quarter, in line with the overall gain for 2012.
While this renewed confidence and increased consumer spending has been a positive, the sharp decline in the personal savings rate in the first quarter is a cause for caution. With income growth still limited, households can only reduce savings so far to fuel spending growth. With inflationary pressures receding again and the jobs market far from healed, the Fed remains well-positioned to continue to refill the punch bowl, keeping consumers happy.
Business investment was weaker than previously estimated, due to a downward revision in inventories. Nonfarm inventories contracted for the second consecutive quarter, while other business investment advanced only modestly.
For now, the business sector appears content to manage their bottom line and take a cautious approach to capital expenditures. As a result, the U.S. capital stock has aged, and businesses will have to invest at some point to simply address obsolescence, if not a need to expand. This pent-up demand will be unleashed at some point; the question is one of timing.
From a big picture perspective, today’s report isn’t likely to move the needle, as it contained no real surprises. The surge in growth early this year alleviated some concerns in the aftermath of the economy grinding slower late last year. However, it’s the most recent chapter in the story of an economy that has moved forward in fits and starts over the past several years.
If the U.S. consumer can maintain their increasingly confident mood and keep spending, the economy may be able to absorb the negative drag from declining government spending and continue to move forward.
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