It's time to catch up on recent reports about the economy. Last Friday's GDP report was somewhat surprising, given the composition of economic growth. While consumption rose moderately (somewhat high by current standards), business investment actually declined. This was likely due to policy issues as some companies moved investment into the fourth quarter of 2011 to take advantage of expiring tax breaks. But even with that, investment growth over the last 2 quarters was lower than any time since the Winter of 2009-10. Investment in equipment grew at an annualized rate of 4.5% over the last 6 months compared to nearly 11% in the previous 6 months. After surging in the Spring and Summer of 2011, investment in structures has declined by about 6.5% in the Fall and Winter (seasonally adjusted, annualized rate). Together, this suggests that the bounceback in investment following the end of the recession is over and firms are now basing their investment decisions on expected economic conditions.
Meanwhile, though consumption was a strong point in the GDP report, the income/spending report released on Monday indicates that consumer spending was slowing down as the first quarter came to an end. After increasing at an annualized rate of nearly 5% in January and February, growth in real consumer spending slowed to just over a 1% rate in March. At the same time, real disposable income was flat for the quarter, resulting in a lower savings rate (i.e., more spending with flat income results in less savings). This implies that unless income starts to increases more quickly, consumer spending should slow down in the coming months.
Given a slowdown in investment growth and slower, but moderate growth in consumer spending, economic growth should remain moderate through the rest of 2012 (barring some external shock, such as from Spain). As discussed elsewhere, moderate economic growth means that employment growth should also moderate, as already seen in the March employment report. This doesn't mean that the economy is going to worsen, but that it should continue to grow at a modest pace.
