A Close Look at How the Economy Is Growing

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The economy grew by 2.5% in the first quarter, according to Friday's report from the Bureau of Economic Analysis.

That's the early reading, at least. These reports are always revised in subsequent months. "Friends don't let friends waste too much time on the internals of a soon-to-be-revised GDP report," wrote Slate's Matt Yglesias.

But let's look at what we've got so far.

Two-and-a-half percent growth isn't strong, but it's pretty consistent with where we've been for most of the recovery over the last four years:

Source: BEA.

Some bumps here and there, but we're stuck at about 2.5% growth. That's probably enough to bring down unemployment, but just barely.

Now for some of the internal components of GDP.

Consumer spending has actually been strong. First-quarter growth was particularly impressive given the expiration of the payroll tax cut:

Source: BEA.

Earlier this year, internal emails between Wal-Mart executives hinted that consumers were being clobbered by the end of the payroll tax cut. That was, however, more speculation than proof. As more data comes out, including corporate earnings reports, it's peculiarly hard to spot the tax hike having much impact.

Fixed investment -- businesses and households investing in things like homes, buildings, and equipment -- is also healthy:

Source: BEA.

One of the big drivers here is residential construction. For years, construction was a net headwind on economic growth as construction of new homes ground to a halt. Now that building is ramping up, residential construction is adding to growth -- 0.3% in the first quarter. This will likely be a big contributor to growth going forward. It almost always does during a recovery.

Businesses tweaking around their inventories can have a big impact on quarterly GDP figures. In the fourth quarter, a large drawdown whacked overall growth. We made up most of the loss in the first quarter:

Source: BEA.

So, what's keeping growth low? Government spending (or a contraction of it) is now a significant drag on growth:

Source: BEA.

And within government, the real culprit is a decline in defense spending:

Source: BEA.

Keep in mind that there's basically no correlation between what the economy is doing today and what stocks might do tomorrow. The correlation between current GDP growth and five-year subsequent stock returns is -0.06. About zero, in other words. For three-year, forward-looking market returns, the correlation is -0.09 -- still about zero! For one-year returns, it's -0.21 -- still low. Returns of the Dow Jones (DJINDICES: ^DJI  ) will be determined by an unpredictable mesh of earnings and expectations, with almost no rational connection to quarterly GDP reports. Honest. 

Read/Post Comments (11) | Recommend This Article (15)

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  • Report this Comment On April 26, 2013, at 12:10 PM, SkepikI wrote:

    I am thank goodness, not much of an economist, so I dont buy into the idea that 2.5% gdp growth with government spending declining is a bad thing. I suspect anything over 4% would ignite a vicious round of inflation..maybe even 3% would do it. Slow steady growth, with less government corruption, waste and cronyism is the only way out of the mess we allowed to happen.

    And I dont buy "Government spending (or a contraction thereof) is a significant drag on growth". A drag on GDP as the system chooses to measure it? yup, axiomatic. A drag on growth that matters to you and me? Doubtful.

  • Report this Comment On April 26, 2013, at 5:04 PM, kyleleeh wrote:


    I have no idea what you do for a living, but I'm reasonable sure that at least some of the consumers providing you're income are government employees or do business with government agencies. If they are no longer able to spend the money that is providing you with a job, it will definitely matter to you.

  • Report this Comment On April 26, 2013, at 9:55 PM, SkepikI wrote:

    ^ what matters more to me is that what gets spent actually produces something of value. Otherwise it might as well be bulldozed into a big pile and set afire. Which might be a big improvement on funding crooks, con artists, enemies of the Constitution (like the Boston Bomber boys). If all the government employees doing dirt to us and the best interests of the country STOPPED spending money and my income went down, I would find another way. I've dug ditches, picked strawberries, busted trail, as well as run nuclear submarine equipment. I can find a way to make a living. What I cant find is a way to stop the thievery.

  • Report this Comment On April 27, 2013, at 5:40 AM, BrettArnold wrote:

    What are the facts on the U.S economy?

    1) Retail-sales data proved better than expected

    2) An increase in the factory workweek to the longest since World War II indicates that the jobs growth in the sector is set to continue. Production staff worked an average 41.9 hours a week in February, tying with December 1997 and January 1998 as the most since May 1944. Companies will need to think about recruiting for future needs, not just for their immediate requirements, if demand stays steady, says employment consultant John Challenger.

    3) Truck tonnage in January was up 6.5% from a year ago, strong evidence that the economy continues to expand.

    4) Housing construction continuous to grow

    First-quarter U.S. gross domestic product to grow 2.5%, compared with an earlier forecast of 1.5% by J.P.Morgan

    It is very hard to argue with the statistics and according to all indicators this year will be good for the stock markets, as accurately predicted by

    I Know First algorithmic system,

    last December.

  • Report this Comment On April 27, 2013, at 6:57 AM, kyleleeh wrote:

    << what matters more to me is that what gets spent actually produces something of value. >>

    That's very much in the eye of the beholder. How much "value" is created by a nuclear submarine? To my knowledge the technology has only been used as an instrument of destruction...therefore to many people you have been paid to produce something of no value...did you feel the same way when you received your paycheck?

  • Report this Comment On April 28, 2013, at 7:09 PM, SkepikI wrote:

    ^ Hardly worth a rational discussion. Suggest you look at historical analysis of Stalin and USSR.

    On a less ancient history note, The feeding of Solyndra, SoloPower, A123, Revolt, etc etc has not only burned tax resources at a prodigious rate, but funded con artists who will go on to fleece others with their imprimatur of government approved "entrepreneurship" That is value destruction big time. Or, you could take the example of the Boston Bomber boys, at least one funded by local taxpayers while he planned mayhem... far too much of this going on, thus reduction in overall spending by government sources while meat axe control, is better than NO control at all.

  • Report this Comment On April 29, 2013, at 3:20 AM, kyleleeh wrote:

    << Suggest you look at historical analysis of Stalin and USSR. >>

    Stalin was dead when the first nuclear sub was launched, no nuclear sub was ever used in combat against the USSR. How is Solyndra creating energy that we don't need different from you working on nuclear subs for a war that never happened?...they both seem like one persons waste and another persons livelihood to me.

    No argument on controlling spending, but as to your statement that government spending cuts don't effect you and me, I don't know how someone who was once on the defense departments payroll could say that. Most of the cuts have been in defense...would it have not effected you if they had scrapped the nuclear sub program and laid you off?

  • Report this Comment On April 29, 2013, at 7:25 PM, xetn wrote:


    "I'm reasonable sure that at least some of the consumers providing you're income are government employees .."

    Don't you realize that before a government employee ( or a government contractor)can spend any money, they first have to steal it from the taxpayers?

    Another tidbit: let us assume that a government employee earns $100,000. and pays tax of say 20%, he is not really paying any taxes. His real income (from theft of the taxpayers) is really $80000, not $100000. So, do not believe the BS that government employees are also taxpayers.

  • Report this Comment On April 30, 2013, at 7:44 AM, gkirkmf wrote:

    Let me preface this by saying that I am not one of these pseudo tea party “patriots” who seem to grace these pages too often… Also, I too have served our country for a number of years in the intelligence service (no jokes!!). I have worked in and out of the defense establishment for 40 years (retired now) so I feel qualified to say this without reservation… Fully 2/3 of all defense spending, and (my best estimate) ¼ of the rest of government spending in general is what I deem “Welfare for the Rich”. Who are these “rich”? They are not the hedge fund guys or the banksters… They are large defense corporations, and a large body of upper middle class Americans. Yes, we have met the enemy, and he is US. This was not the case when I was entering the work force at age 9 as a newspaper carrier… but by the time I exited the Army in 1969, it had already started big time. The military industrial government complex Eisenhower warned us about had already bitten the apple and was taking charge of our government…. The economy has not been the same since. IMHO, the cutting of defense spending is the only good thing to come out of the idiots in congress for 50 years, and of course, it will not last. If the cuts were to continue, I think it would be in the best interest of our economy. In the long term, we will have to free ourselves for the religion of “growth and progress” that has developed in this country, and deal with the rapidly declining resource problems which have fueled our spending binge…. And don’t get me started on “too big to fail” or AT&T.

    “Each time history repeats itself, the price goes up.”

    --Author Unknown.

  • Report this Comment On May 01, 2013, at 10:57 AM, moneytrail wrote:

    After reading your article one might walk away believing we actually are in an economic recovery. Well, not in this universe.

    Let’s wade through your fog of charts and misleading statistics to view what is really happening to the US economy.

    Government spending is NOT contracting; it is growing with the wasteful entitlements segment continuing to suck vitality out of the private sector. The sequester did not cut spending, it REDUCED the projected INCREASE in spending. The government is still diverting productive resources away from the private sector at an alarming rate and transferring them to non-productive activities; such as loans to failed ‘green’ industries, $80 billion in food stamps, more than $250 BILLION of waste and fraud each year, to name a few.

    We are about to enter the 5th year of this so-called economic recovery and 2% growth seems to be the best we can do. As a result there are at least 5 million fewer workers in the US since ’08, even after adjusting for baby boomer retirees; job growth is consistently below 200k jobs per month and appears to be on a downward slope, as we head towards 100 thousand new jobs per month; there are still more than 23 million Americans who are either unemployed or who have stopped looking for work; counting those who have stopped looking for work the real unemployment rate is more than 11%, and it is in excess of 14% (U6) when the underemployed are counted along with the unemployed; real wages are dropping; home ownership is at a 40 year low; etc., etc., etc.

    The ravages of Obama Care and its countless tax increases on companies and individuals is beginning to cause structural damage the economy, with much more to come as our privileged politicians scramble to exempt themselves from this liberal, economic “train wreck,” as identified by Democrat Senator Max Baucus, the primary author in the Senate of this wealth destroying legislation.

    The President’s relentless war on success is causing companies to maintain trillions of dollars oversees because of punishing taxes on repatriated dollars that have already paid taxes to a foreign tax jurisdiction.

    Bozo the President is stuck on “stupid,” as evidenced by his budgets which even his own radical Party in Congress won’t touch because it rewards indolence and punishes honest wealth creation, along wiht responsible saving and investing.

    Maybe you can find some more charts to camouflage the sorry state of the US economy after 4 years (with 4 more to come) of relentless assaults by the President on the most successful opportunity generating economy the world has ever known.

    Happy May Day!

  • Report this Comment On May 01, 2013, at 11:34 AM, moneytrail wrote:


    Home ownership is at a 20 year low; not 40 year low.

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