June 2011 - Parsons Brinckerhoff

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Perspectives Economic Review & Outlook: Mixed Messages Continue source: Matthew Kenwrick (flickr) 1 Percent Change (Annual Rate) 8 6 4 2 0 -2 -4 -6 -8 -10 by Michael Rodriguez U.S. Real GDP Growth and Components of Real GDP Growth Consumer Spending Business Investment Net Exports Government Spending U.S. GDP source: U.S. Bureau of Economic Analysis The U.S. economy showed mixed performance over the last several quarters, as economic indicators of various sorts point in different directions. So what do we make of an economy that has posted seven quarters of consecutive real GDP growth, but has decelerated its growth? An economy where the S&P 500 grew 13 percent from December 2010 through April 2011, but total jobs barely increased half a percent over the same period? While the answer lies to some extent in the eye (or portfolio) of the beholder, the overall message is that the economy continues to grow, but that growth is sluggish, that there remain significant risks which could further inhibit growth, and that jobs creation is not keeping pace with overall business performance. In particular, unemployment remains in dire straits and the construction sector continues to find recovery elusive. First quarter growth and economic components The first quarter of 2011 grew at a slower rate than the fourth quarter of 2010, with U.S. real GDP growing at a 1.8 percent annualized rate compared to 3.1 percent in the previous quarter. This slowdown may just be a blip instead of a trend, a viewpoint expressed by the Federal Reserve. For example, the economy was impacted by current geo-political issues. However, these may be more lasting and may negatively affect the economy for at least a time. High oil and gasoline prices have been attributed to various causes, including turmoil in the Middle East and commodities market speculation, and global droughts and crop difficulties, as well as higher fuel prices, have contributed to increases in agricultural commodity prices, which had reverberating price impacts on staples like ground beef, chicken, various produce goods, and most consumer products that are heavily dependent on corn and wheat. Consequently, a larger share of household disposable income was spent on fuel and food. Looking into the components of GDP brings out the mixed messages. As Box 1 shows, the positive contributors to GDP growth were consumer spending and an increase in business investment. In terms of consumer spending, on the one hand we have 1.91 percent growth in the first quarter; on the other hand, this was a reasonable deceleration, considering consumer spending grew 3.04 percent in the preceding quarter. Nonetheless, the first-quarter increase in consumer expenditures is attributable to purchases of motor vehicles, recreational goods and vehicles, and EFR Economic Review & Outlook: Mixed Messages Continue | 25
Perspectives household expenditures in health care, food services (i.e., restaurants), and financial and insurance services. The uptick in motor vehicle sales may echo the higher fuel prices as consumers consider newer and more fuel-efficient vehicles, and the overall health of the auto industry shows this. General Motors grew April 2011 sales 26 percent year over year, and Ford had its best first quarter profit in 13 years at 18 percent growth. On the business side, firms continued to increase inventories and purchase equipment and software. These purchases, combined, are responsible for the vast majority of the growth in first quarter business investment. Industrial production was up as well —industrial capacity utilization stood at 76.9 percent (Box 2, left) and has steadily increased since the spring of 2009. The historically healthy capacity utilization rate is around 80 to 85 percent, and continued business investment will push this number upward. Industrial production benefits suppliers and indicates business confidence in consumer activity. The countervailing signal from this, however, is that the historic link between increases in capacity utilization and subsequent hiring has not yet materialized. source: David B. Gleason (flickr) While federal non-defense spending remained steady, an 11.9 percent reduction in military spending was responsible for much of the decline in overall government spending. Real estate has traditionally been one area that plays a significant role in both consumer spending and business investment, and here too there are dichotomous trends. New housing starts were up 7.6 percent in the first quarter compared to the previous quarter, but they were down 5.7 percent year over year. Moreover, real private residential investment continued a negative trend, decreasing 2.5 percent in the first quarter year over year. The last positive sign in this sector was in the second quarter of 2010 after a boost from the government’s now-expired homebuyer tax credit. Home prices have decreased for three consecutive quarters, although the prices have more or less stabilized according to the Case-Shiller Index (Box 2, right). The next component of GDP, government spending, was responsible for hindered short-term GDP growth. Overall, government spending in the first quarter declined 5.2 percent. While federal non-defense spending remained steady, an 11.9 percent reduction in military spending was responsible for much of the decline in overall government spending. The rest of the decline is attributed to state and local governments cutting back. This is significant: from the data in Box 1, if government spending had remained constant at zero growth, real GDP growth in the first quarter would have been 2.9 percent. source: Federal Reserve Bank of St. Louis (left) Federal Reserve, Case-Shiller Index (right) 85 80 75 70 65 Billions $ $700 $600 $500 $400 $300 $200 $100 250 200 150 100 50 Case Shiller Index Left: U.S. Industrial Capacity Utilization, Monthly (percent) Right: Real Private Residential Investment & Home Prices (Case Shiller 20- City Composite Index), Quarterly Real Private Residential Investment Case Shiller 20-City Index 2 60 $0 0 26 | Economic Review & Outlook: Mixed Messages Continue
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June 2011 - Parsons Brinckerhoff

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