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Thursday, April 28, 2011

Taking a Look at the "Transitory" Slowdown in Q1 GDP

UPDATED: made a mistake in the earlier version (apparently I'm a bit rusty).

Bernanke per his testimony (bold mine):
Most of the factors that account for the slower growth in the first quarter appear to us to be transitory. They include things like, for example, lower defense spending than was anticipated, which presumably will be made up in a later quarter. Weaker exports, given the growth in the global economy. We expect to see that pick up again. And other factors like weather and so on.

Now, there are some factors there that may have a longer-term implication. For example, construction, both residential and nonresidential was very weak in the first quarter. That may have some implications going forward.

So I would say that roughly that most of the slowdown in the first quarter is viewed by the committee as being transitory. That being said, we've taken our forecast down just a bit, taking into account factors like weaker construction and possibly just a bit less momentum in the economy.

I have a hard time believing a decline in government spending will stop any time soon and that drop in exports Chairman Bernanke referenced seems non-existent in the numbers. Also note that the level of real imports ignores the fact that the price of those imports spiked. In real terms imports reduced GDP by only -0.79%, but a whopping -4.16% in nominal terms.

Finally, when looking at the sustainability of growth, one always needs to consider how we are building the infrastructure (i.e. productive non-residential investment) for future growth. On that front, this was a HUGE disappointment.

Source: BEA