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Economic Slowdown Will Get Worse

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

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.

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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.

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Households borrowed to finance the recent surge into auto sales and higher education; however debt-financed growth in those sectors should not be expected to continue.

The potential volume of auto sales is likely close to its peak and young people and parents are becoming dis-enamored with colleges and ever-surging tuition. Undergraduate education is too expensive -- some majors and degrees simply don't pay out well as investments -- and borrowing for higher education may soon plateau or decline. Graduate study is often not a good solution for underemployment among recent college graduates.

Inventory investments accounted for some 26% of the 2.2-point increase in first-quarter GDP. Much of this likely was unplanned stock building -- businesses miscalculating future sales rather than correctly anticipating future growth. Hence, in the second quarter, inventory adjustments and a pullback from stock building should occur.