A Few Comments About Q1 GDP...

The two leading sectors, residential investment (RI) and personal consumption expenditures (PCE), moved in different directions in Q1:

 

PCE increased at a 3.6% annualized growth rate compared to 1.6% in Q4. PCE was driven by a decline in the savings rate to 3.1% (from 3.9%) and transfer payments (I'll have more on this).

RI declined 10.9% in Q1, compared to an increase of 3.8% in Q4.

Click on graph for larger image in new window.

This graphs shows Residential investment (RI) as a percent of GDP since 1947.

RI as a percent of GDP is at a new record low. And there is no reason to expect a sustained increase in RI until the excess housing inventory is absorbed.

Notice that RI usually recovers very quickly coming out of a recession. This time RI is moving sideways - not a good sign for a robust recovery in 2010.

This graph shows the real GDP declines from the prior peak for post WWII recessions.

The recent recession was the worst since WWII (the peak decline was 3.83% in Q2 2009).

Even after three quarters of growth, current GDP is still 1.2% below the prior peak in real terms. For a "V-shaped" recovery, GDP would already be close to previous highs - and GDP has performed better than most other indicators. The recovery has been modest-to-moderate so far, and if growth continues at this pace (I think it will slow), it will take a couple more quarters to return to the pre-recession peak in real GDP.

I'll have some more on GDP and investment later...

The change in private inventories was smaller this quarter - adding 1.7% to GDP in Q1 2010 compared to 4.4% in Q4 2009. It is important to note that the inventory contribution to Q4 GDP was from a slowdown in the liquidation of inventories, but in Q1 businesses were building inventories - and this inventory build will probably slow in Q2.

As I noted earlier, the two leading sectors, residential investment (RI) and personal consumption expenditures (PCE), were mixed. RI declined to a new record low as percent of GDP, however PCE increased at a 3.6% real annualized rate.

The increase in PCE does not seem sustainable unless employment and incomes increase soon. A large portion of the increase in PCE came from a decrease in personal saving.

Click on graph for larger image in new window.

This graph shows personal saving as a percent of disposable personal income.

It is not unusual for the saving rate to decline at the beginning of a recovery as people become more confident. This helps drive consumer spending, but with the high levels of household debt, I expect the saving rate to increase over the rest of the year.

Here are some Q1 numbers (all annualized):

Personal consumption expenditures (PCE) increased $130.7 billion

Personal saving declined $88.5 billion.

Government social benefits to persons increased $61.1 billion.

So the boost in PCE came from the decline in saving and the increase in benefits. That is not sustainable.<

The second graph shows real personal income less transfer payments as a percent of the previous peak. Unlike the recovery in GDP (previous post), real personal income less transfer payments has barely increased and is still 6.6% below the pre-recession level.

The peak of the stimulus spending is in Q2 2010 (right now), and then the stimulus spending starts to taper off in the 2nd half of 2010. So underlying demand better increase soon - and that means jobs and incomes going forward. Unfortunately residential investment is usually one of the key engines for employment and growth at the beginning of a recovery - and

I expect RI to be sluggish all year because of the huge overhang of existing housing units. So my guess is the recovery will probably remain sluggish, and I still expect a slowdown in the 2nd half of 2010.

This post is reprinted from Calculated Risk, a finance and economics site.