The Corner

Economy Grows by 2.5 Percent in First Quarter, Slightly Below Expectations

The Bureau of Economic Analysis released its latest gross-domestic-product figures this morning, and they were slightly lower than expected: The economy grew by 2.5 percent in January through March, while economists had predicted about 3 percent growth in the first quarter.

Growth is largely attributed to stronger consumer spending, which rose 3.2 percent, and investment in private inventories after companies shrunk their inventories dramatically in the fourth quarter of last year, a sign of uncertainty — inventory changes added 1.03 percentage points to GDP growth this quarter, while it subtracted about 1.5 percent in the fourth quarter.

The two main drags were lower federal spending and lower state and local government spending; this report reflects one month (March) of the federal government’s lower spending levels due to sequestration. Federal consumption expenditures dropped 8.4 percent over the past three months — even more dramatically just in defense, where it dropped 11.5 percent — and state and local spending dropped 1.2 percent. (Note that these don’t actually represent changes in government’s total expenditures or outlays; just the purchases categories that contribute to GDP.)

If you strip away the effects of government spending on GDP (a $25.5 billion drag), actually, the number looks a bit stronger: The private economy alone grew by 3.2 percent.

This quarter was certainly stronger than the last; in the final quarter of last year, the U.S. economy only grew by 0.4 percent (after it was initially reported that the economy had shrunk).

The BEA also releases specific “personal income” numbers, and this quarter wasn’t a strong one: Nominal personal income actually dropped 3.2 percent from the previous quarter, after rising 8.1 percent in the fourth (which pushed up the savings rate in that quarter, too). This happened for two reasons: Higher dividend payments, investment dispositions, etc. in the fourth quarter because of the higher taxes expected in 2013, and “a sharp acceleration in contributions for government social insurance,” also known as the expiration of the payroll-tax cut.

What’s interesting, though, is despite that substantial hit to personal income, personal spending numbers didn’t drop dramatically; they were actually a slightly positive source of growth in the quarter. It appears that the predictions of economic pain due to this tax-side austerity – the increase in people’s payroll-tax rates from 4.2 percent to 6.2 percent — may have been slightly overrated.

Patrick Brennan was a senior communications official at the Department of Health and Human Services during the Trump administration and is former opinion editor of National Review Online.


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