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Is Q2 GDP To See A Slower Growth Rate?

 April 30, 2012 09:51 AM

(By R. Chandrasekaran) The real gross domestic product (GDP) for the first quarter advanced 2.2 percent at an annualized rate. This is the eleventh straight quarter of GDP expansion and comes on top of 3.0 percent upside witnessed in the fourth quarter. Significantly, the first quarter GDP growth pace came below economists' predictions of 2.5 percent growth.

With disappointing fixed investment spending, the next question is whether the second quarter GDP will be slower than the first quarter.

Real personal consumption expenditures recorded a 2.9 percent increase, the biggest growth pace in five quarters. This was fueled by 15.3 percent increase towards durable goods spending, which witnessed the second straight quarter of double-digit upside.

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Auto sales looked positive after a few years of weak sales. However, spending towards services continued to be slower than in Q4, rising only 1.2 percent. This is only half the rate that averaged between the 2003 and 2007 expansion.

While consumer spending was strong, fixed investment spending was a big disappointment rising at just 1.4 percent rate in the first quarter. Significant growth of 19.1 percent in residential investment was mostly offset by the 12.0 percent drop in nonresidential construction.

Business spending towards equipment and software grew only 1.7 percent, the weakest growth rate after the 2009 second quarter. Government spending continued to exert headwinds on the economy dragging at a 3.0 percent pace. For the six straight quarters, government spending has contracted on cutbacks at the state as well as local levels.

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The possible biggest concern seems to be higher inventories that had boosted headline growth pace by 60 basis points. Business might witness slower paces of production if the buildups were unintended. Also, recent events indicate that industrial production growth rate has slowed down.

In a research note to clients, Wells Fargo estimates second quarter GDP to be sub-2 percent growth pace. In 2011, first quarter GDP rose a modest 0.4 percent, whereas second quarter witnessed 1.3 percent upside. Unlike last year, the economy is not stalling. Yet, economists would not term the 2.2 percent growth as strong.

The situation in the rest of the world is not good enough for the largest economy of the world to look for solid exports in the second quarter. Obviously some fiscal tightening in the rest of the world could impact the U.S. GDP.

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