(Calculated Risk)
In its first estimate for the first quarter of 2012, the Bureau of Economic Analysis
reported Friday morning that real (inflation-adjusted) gross domestic product rose at an annual rate of 2.2 percent, below the 2.5 percent consensus of experts surveyed earlier this week by Bloomberg, and well below the 3 percent growth records for the fourth—and best—quarter of 2012.
The increase in real GDP in the first quarter primarily reflected positive contributions from personal consumption expenditures (PCE), exports, private inventory investment, and residential fixed investment that were partly offset by negative contributions from federal government spending, nonresidential fixed investment, and state and local government spending. Imports, which are a subtraction in the calculation of GDP, increased.
The deceleration in real GDP in the first quarter primarily reflected a deceleration in private inventory investment and a downturn in nonresidential fixed investment that were partly offset by accelerations in PCE and in exports.
GDP gauges the total reported output of goods and services. It does not measure personal income or people's well-being.
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This "advance" estimate will be revised in two follow-up reports in May and June when more complete data are available. Last quarter, GDP growth was up 3 percent, 1.8 percent for all of 2011.
A good number to focus on in each report is final domestic sales—that's GDP minus the change in private inventories. This came in at 1.1 percent in the fourth quarter, and rose by 1.6 percent in today's report. Household purchases rose 2.9 percent, above the most optimistic projection.
“This was a healthy quarter, with more growth coming from final demand,” Christopher Low, chief economist at FTN Financial in New York, said before the report. “Consumer spending picked up. We’re moving in the direction of a sustainable expansion, but it’s too early to declare victory.”
Far too early, in fact. While the personal consumption expenditures that pay for the higher sales rose, a good deal of those expenditures came out of personal savings, not from increased earnings. Real disposable personal income increased just 0.4 percent, compared with an increase of 1.7 percent in the fourth quarter. Such spending is unsustainable over the long run.
Growth of 2.2 percent is too slow to make up for lost ground. “I don’t think the issue is whether or not the growth rate is sustainable,” said Steven Blitz, chief economist of ITG Investment Research. “I think the question is whether the growth rate that’s sustainable is acceptable — politically and socially acceptable.”
Until the past couple of months, forecasters had been very cautious after getting burned by predicting in December 2010 that GDP expansion would be as high as 5 percent for 2011. More recently they seem to be engaged in a newfound optimism and have raised estimates for 2012 from a range of 2.2-2.4 percent growth to 2.4-2.6 percent. That optimism requires them to downplay the impact of a tighter federal budget, a rebound in home foreclosures, economic problems in Europe and a slowdown in economic growth in China, where some economists see a bursting bubble in housing prices.
This is the 11th consecutive quarter of growth in real GDP. That is certainly better than the direction things were going in five of the six preceding quarters when we were in the depths of the Great Recession. But the still lousy state of the housing market, a deficit of 10 million jobs and exceedingly unequal distribution of gains in the fragile economic recovery are three of many indicators that we need a better way to rate economic health than GDP.
As Robert F. Kennedy said in 1968, GDP "measures everything, in short, except that which makes life worthwhile." As I have written previously:
Take pollution. GDP measures as income a manufactured product that creates pollution as a byproduct. It then measures the clean-up as income. It then measures health services to those sickened by the pollution as income.
GDP also leaves out things such as income inequality, the intensity of poverty, economic security, crime costs, the economic value of civic and voluntary work, the economic value of unpaid housework and child care, educational attainment and life expectancy. It’s a measure that assigns zero value to leisure time, to the depletion of mineral and other natural resources, to the benefits of saving, to trade imbalances, to deficits and debt.
There have been efforts to replace or at least provide a strong alternative gauge. For instance, the
Commission on the Measurement of Economic Performance and Social Progress put forward by French President Nicolas Sarkozy with Nobel economists Joseph Stiglitz and Amartya Sen in charge, published a comprehensive report in 2009. But, despite their 18 months of effort, they did not come up with a new, more realistic gauge.
There have also been other attempts at creating substitutes or, at least, supplements. These include Canada's Genuine Progress Index, the Human Development Index and the Gini coefficient. Except for the GPI, these measure far less than GDP.
