Has the recovery lost momentum?

With the absence of normal drivers of growth (consumers, construction, credit creation), economy watchers have become increasingly pessimistic. Based on employment gains so far this year, many analysts hoped to see a somewhat stronger figure than what the economy delivered for Q1 GDP growth. Although the Q1 advance marked the seventh straight quarterly gain in GDP, the 1.8 percent increase was the smallest since Q2 of last year.

Based on employment gains so far this year, many analysts hoped to see a somewhat stronger figure than what the economy delivered for Q1 GDP growth. Year-to-date through April, non-farm jobs in the U.S. were up by 1.2 million, or nearly 1 percent. Month-to-month job growth has been positive since the year began.

Inconsistent GDP growth

Although the Q1 advance marked the seventh straight quarterly gain in GDP, the 1.8 percent increase was the smallest since Q2 of last year. With the exception of the final quarter of 2009 and Q1 of 2010, the recovery has not brought two consecutive quarters of growth above 3 percent. The average rise in GDP over the past seven quarters was only 2.8 percent, somewhat below the average quarterly 3.0 percent increase for the two decades from 1987-2007.

The drivers of growth in Q4 have turned weaker. After growing by 4.0 percent in Q4 of 2010, personal consumption expenditures decelerated to 2.2 percent growth in Q1. The Q4 surge by consumers was the strongest gain since the 5.2 percent growth recorded in Q1 of 2006. While residential and nonresidential construction were up in Q4, both decreased in Q1.

Bad weather and persistently bad housing markets brought a decrease in Q1 of 3.3 percent for residential building, after an increase of 3.3 percent in Q4. Meanwhile, nonresidential construction plummeted by 16.8 percent in Q1, following a solid 7.6 percent gain in Q4. Government is typically expected to be a source of stability for the economy, but combined federal, state and local government spending fell by 5.1 percent, the steepest one quarter drop since Q4 1983.

Contribution to GDP

The Bureau of Economic Analysis calculates the contributions to percentage changes in GDP by components of spending (Table 2). Consumption added 1.53 percentage points to the GDP growth rate, and additions to private inventories added an additional percentage point. But reductions in federal, state, and local government expenditures subtracted more than one percentage point, while exports and imports just about cancelled out.

The Q1 contributions to growth paint a picture of an economy that has still not built up much forward momentum. Consumer spending accounts for about 70 percent of GDP, and consumers were buffeted in Q1 by high gas and food prices, along with persistently high unemployment and falling home values.

The equipment and software component of fixed investment grew 11.6 percent in Q1, and contributed 0.8 percentage points to the GDP growth rate. But residential and nonresidential construction are also included in fixed investment, so on net there was a minimal contribution to growth from investment spending.

The outlook dims

The outlook for robust growth in the next few quarters appears dim. Consumers are still deleveraging, although durable goods outlays (including autos) were up again in Q1, this time by 8.9 percent. Construction will not begin a sustained recovery anytime soon. A falling dollar is expected to help exports, but this just may be offset by rises in imports.

As manufacturing improves, global sourcing of parts and supplies increases imports, which subtracts from GDP. Meanwhile, the effects of the Federal Reserve policy of Quantitative Easing on the real economy seem limited. Compared to last year at this time, non-borrowed reserves of the banking system are up by about 50 percent, but commercial and industrial loans are only up by less than 5 percent.

Businesses have significant retained earnings to finance productivity-improving new equipment and technology, but so far hiring has not been sufficient to make much of a dent in unemployment, especially the long-term variety. With the absence of normal drivers of growth (consumers, construction, credit creation), economy watchers have become increasingly pessimistic.

The national Blue Chip newsletter reports economic forecasts by 52 leading corporate economists each month. Forty-seven of these are now projecting that GDP for all of 2011 will grow by less than 3.0 percent. And 45 of the 52 are forecasting GDP below 2.9 percent, which means that the dominant view as of now is that 2011, the second year of economic recovery, will be a weaker year for economic growth than 2010.

Serpil Atalay is in the Communications Department of the Central Bank of Turkey. She is at Arizona State University this year as a Hubert Humphrey Fellow in the Cronkite School of Journalism and Mass Communication.