How could G.D.P. have declined when consumers and businesses both spent significantly more than they did in the previous quarter? JohnCassidy explains why the recently reported drop is misleading.
Buoyed by strong job growth, American households continued to spend amply in the first three months of this year, and U.S. businesses invested heavily in new equipment, particularly in information technology. Over-all sales generated by the private sector increased at a healthy annual rate of 3.7 per cent, which augurs well for the rest of the year., released by the Commerce Department on Thursday morning: personal consumption increased at an annualized rate of 2.
First, a good deal of the extra spending was on goods and services produced outside the U.S., which added to the trade deficit rather than G.D.P. Despite all the stories about supply-chain problems overseas and clogged ports at home, a lot of imported products—such as computers, clothes, and semiconductors—still managed to make their way here.
Another negative factor was a runoff in inventories, goods that businesses keep on hand for restocking purposes. Although changes in inventories don’t generate any sales at the time that they are made, government statisticians count them in G.D.P. on the ground that they are part of what the economy produces. In the fourth quarter of last year, many businesses built up their inventories to prepare for the holiday season and avoid snafus; this helped boost the headline G.D.P.
If you add these three volatile factors affecting G.D.P. together, they reduced the headline growth figure by roughly 4.5 percentage points, which explains why it came in negative even though underlying spending by households and businesses was strong. It should also be noted that in the first three months of the year employers created nearly 1.7 million jobs, and the unemployment rate fell from 3.9 per cent to 3.6 per cent. In other words, the headline G.D.P. figure was misleading.
In the coming quarters, the inventory restocking and fall in military spending are likely to reverse themselves—which should be positive for G.D.P. growth. What will happen to the other special factor—the trade balance—is more difficult to say. Given the
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