Economic Slowdown Will Get Worse
NEW YORK (TheStreet) -- The Commerce Department reported the economy grew at a 2.2% annual rate the first quarter of 2012, slower than the 3.0% pace registered the previous period. The consensus forecast was 2.5%, while my forecast was exactly on mark at 2.2%.
GDP growth was powered by much stronger consumer spending -- especially on autos and recreational vehicles -- substantial additions to business inventories and stronger residential construction. Also, business investments in machinery and software contributed a bit too.
Reductions in government spending, nonresidential construction and a slightly widening trade deficit subtracted from growth.
The deficits on oil and with China account for nearly the entire $621 billion trade deficit -- nearly 4% of GDP. Cutting these in half, through changes in energy and trade policy, would increase GDP, including multiplier effects, by some $500 billion and create 5 million jobs.
Second-quarter growth will likely slow to about 1.6%, as consumers pull back and investments in new inventories slow. Business investment should not be expected to pick up the slack, stabilizing oil prices will likely boost imports a bit and government spending will stay in neutral or decline in the face of tightening fiscal conditions. Without further reductions in adult labor participation, the unemployment rate is not likely to fall much more.
Over the last several months, households have been running down savings to finance the recent surge in consumer spending and households should be expected to pull back on purchases to rebuild balance sheets.
Improvements in the availability of crude oil and anticipated refinery capacity should help lower gasoline prices to about $3.50 per gallon from their early April $4 high. Consumers used credit cards to cope with higher gasoline prices, and much of the additional disposable income created by lower gasoline prices in May and June will be used to pay down those balances.