First-Quarter Growth May Be Slower but Stronger
By Kathleen MadiganGrowth of 2.5% is looking a whole lot stronger than 5.9%.
After Friday’s reports on retail sales and inventories, real gross domestic product looks on track to grow between 2.0% and 2.5% this quarter. That is quite a few notches down from the 5.9% rate posted in the fourth quarter, but the mix suggests a much stronger economy.
Demand is now leading the way, instead of inventories. And even modestly rising demand creates a more sustainable recovery because increased spending starts the virtuous cycle of more orders, production and hiring, leading to more spending.
The 0.3% gain in February total retail sales was a pleasant surprise since economists expected sales down by 0.3% because of falling vehicle sales and bad weather.
Core sales — a measure that goes directly into GDP calculations and which exclude autos, building materials monster beats, and gasoline — jumped 0.9%. Alan Levenson, chief economist at T. Rowe Price, says the uptrend in core sales suggests real consumer spending is growing close to 2.5% this quarter, better than the 2% rate he was expecting before the February retail data were released.
Since consumer spending accounts for 70% of GDP, the sector sets the tone for overall growth (what may bring economic growth closer to 2% is the expected drop in state and local government outlays.).
The consumer sector’s importance was much less pronounced in the fourth quarter, but that was because the inventory sector had taken the spotlight. Inventories contributed 3.88 percentage points of the 5.7% jump in GDP last quarter.
That contribution isn’t being repeated this quarter.
Business inventories were unchanged in January, instead of the 0.1% gain which had been projected. Inventories would have to jump by more than 1% in both February and March in order for the inventory sector to contribute another 4 points to GDP. History shows inventories don’t turn around that quickly.
Without the push from inventories, final demand will have to account for this quarter’s growth. The February data indicate consumers are back, and that’s a good thing.
Businesses, especially small firms, have said the lack of demand has made them hesitant about expanding and hiring. Businesses also won’t begin restocking inventories until they think orders will keep coming in.
And what about February’s record snowfalls along the East Coast? There seems to have been little impact.
Snowbound consumers didn’t shop online. Internet sales were flat. And Rosalind Wells, chief economist at the National Retail Federation, says the blizzards might have helped sales because “cabin fever” pushed consumers out for some fresh air and shopping once the weather cleared up.
To be sure, the household sector is not out of the woods yet. The Reuters/University of Michigan index of consumer sentiment, already low monster beats, unexpectedly weakened in early March.
The biggest stumbling block remains high unemployment. But sustained increases in demand should push businesses to start adding workers again. And job growth should chase the consumer blues away and keep cash registers ringing.
