Slower growth, for now
AS EXPECTED, America's recovery slowed in the first quarter of 2011. At a seasonally adjusted annual rate, real GDP grew by 1.8% in the first three months of the year, down from the 3.1% growth performance in the fourth quarter of 2010, according to the advance estimate of output released this morning. This deceleration came as no surprise; indeed, some recent forecasts projected an even slower rate of growth.While it's hard not to be a little disappointed in the performance, Americans can take a little comfort in the fact that the slowdown was partially due to transitory factors. Bad weather early in the year dampened consumer activity and residential investment. Defence spending was much slower in the first quarter than anticipated, subtracting 0.69 percentage points from output. This defence shortfall is expected to be made up later in the year.Still, there some reasons to be concerned that growth, moving forward, may lag forecasts. Fed Chairman Ben Bernanke expressed some worry yesterday that low residential investment could continue into the second qarter. That would be good for housing markets, as low supply growth would continue to facilitate market clearing, but it would also constrain growth in output and employment. As long as oil prices remain high, the contribution of personal consumption spending to growth will also be limited. Personal consumption was the biggest contributor to growth in the first quarter, but the pace of spending growth slowed from the end of 2010. Defence aside, government budget-trimming may continue to undermine expansion. All told, government cuts subtracted 1.09 percentage points from the first quarter growth rate, 0.41 percentage points of which came from budget cuts at the state and local level.Inflation hasn't yet reached levels that are likely to spook the Federal Reserve. The Fed's preferred measure of inflation, the core price index for personal consumption expenditures, rose at a 1.5% annual pace in the first quarter, up from prior periods but still below 2%.It was a lacklustre quarter, more or less, which is probably what it felt like to most Americans. Transitory factors or no, it's clear that the economy is performing below trend with an underlying rate around trend growth, when growth well above the trend rate is currently needed to bring down the rate of joblessness. One-third of the way into the second quarter, it doesn't appear that the American economy is achieving that kind of pace.