U.S. First-Quarter 2012 GDP Growth Slows

• The advance, or first, estimate of US first-quarter 2012 annualized GDP growth was 2.2%, which represented a slowing from a 3.0% gain in fourth-quarter of 2011 and slightly lower than the 2.5% expected within financial markets.
• The moderation in the pace of activity was the result of a smaller addition to growth from inventories and a decline in business investment. Government spending continued to decline in the first quarter of 2012 although at a more moderate rate relative to the fourth quarter of last year. Additional offsets were provided by a strengthening in consumer spending and residential investment.
• While indicating moderation from the pace of growth in fourth quarter of 2011, the gain in first-quarter 2012 GDP suggests that improved momentum in private spending that had built up during the second half of last year remained largely intact early in 2012. Looking ahead to the second quarter of 2012, we assume this strength will continue that along with less drag from both business inventories and government spending will result in second-quarter 2012 growth rebounding slightly to 2.6%.

The advance, or first, estimate of annualized US first-quarter 2012 GDP growth was 2.2%, which was weaker than the 2.5% expected and down from the 3.0% recorded in the fourth quarter of last year. The slowing in growth relative to the fourth quarter mainly reflected less of a build in inventories, which only added 0.6 percentage points to growth following a sizeable 1.8 percentage point addition in the fourth quarter of 2011. As well, business investment dropped 2.1% in the quarter following a 5.2% increase in the fourth quarter of 2011 with non-residential structures sinking 12.0% in the first quarter of this year. Government spending continued to decline dropping 3.0% in the first quarter although this represented moderation from the 4.1% drop in the final quarter of last year.

Tempering this slowing was growth in consumer spending, which grew by a solid 2.9% and compared to a 2.1% increase in the fourth quarter of 2011. As well, growth in residential investment rose 19.0% from the fourth quarter of 2011’s already strong double-digit gain of 11.7% although some of this strength may have reflected warmer than usual winter temperatures.

While marking moderation from the pace of growth in the fourth quarter of last year, the gain in first-quarter 2012 GDP suggests that improved momentum in private spending that had built up during the second half of last year remained largely intact early in 2012. Encouragingly, the respectable pace of growth in the first quarter of 2012 was despite a sharp moderation in the support to growth from inventories with offset provided by notably stronger domestic demand. The increase in first-quarter 2012 GDP was likely partly the result of a warmer than normal winter, thereby suggesting some downside risk to residential investment in the second quarter of this year, because this effect will unwind as temperatures return to closer to normal in the spring. With that said, we expect that underlying improvement in labour markets and signs that, even accounting for favourable weather, housing markets have begun to show modest underlying improvement will remain sufficient to allow further growth in consumer spending. In addition, improving domestic demand, still highly stimulative monetary policy, and healthy business balance sheets will result in stronger growth in business investment spending going forward. Finally, we assume less weakness in government spending that on balance points to GDP growth at a 2.6% rate in the second quarter of 2012.