Where Does the US Economy Go From Here?

First-quarter GDP growth in the US was a pathetic 0.6%, it

turns out. This is great news, says Justin

Lahart: it shows that companies were running down their inventories at the

beginning of the year, and so will be increasing their production substantially

for the rest of it.

The numbers are certainly consistent with this view. With consumer spending

rising at a 4.4% rate and business spending rising at a 2.9% rate in the quarter,

the main

drag on growth was in inventories.

Companies reduced stockpiles at a $4.5 billion rate last quarter compared

with initial estimates of a $14.8 billion gain at an annual rate. The figures

subtracted another percentage point from growth.

Certainly the wise men at the Fed seem to think that the

worst is now behind us:

The pace of economic expansion had slowed in the first part of this year,

but the recent sub-par performance probably exaggerated the weakness of underlying

demand, and the rate of economic growth was expected to pick up in coming

quarters. Meeting participants anticipated that real GDP would advance at

a pace a little below the economy’s trend rate of growth through the remainder

of this year and then pick up to a rate broadly in line with the economy’s

trend rate in 2008.

But when the consensus is that the only way to go is up, it’s worth paying

attention to the contrarians. Nouriel

Roubini reckons that second-quarter growth will also be less than 1%, for

instance, and says that the consumer growth propping up the Q1 figure is going

to fall substantially in Q2:

In Q1 private consumption grew at a whopping annual rate of 4.4%. In spite

of that – given the weakness of housing, net exports and inventories – GDP

growth was only 0.6%. Now move forward to Q2: we know that Q2 started on a

weak note for private consumption as April retail sales actually fell. Most

analysts are now expecting that consumption may grow in Q2 at an annual rate

of about 2% (down from the 4.4% in Q1). So, unless there is a massive recovery

of net exports, capital spending by the corporate sector, inventory rebuilding,

Q2 growth will remain in the growth recession range.

I guess the key question, as ever, is whether and how the US consumer is going

to be able to keep on spending. During the tech boom, we spent our paper profits

from the stock market. During the housing boom, we withdrew equity from our

properties. Where’s the money going to come from now? Credit cards? That stock-market

wealth effect (again)? Certainly it’s not going to come from savings.

I’m no economic forecaster, and if I was an economic forecaster I would –

like most economic forecasters – be more wrong than right. My rule of

thumb is simply to trust the market on such things, because the market is generally

more right than wrong. With the S&P 500 hitting all-time highs, I’m sanguine.

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