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Don’t be fooled by today’s economic growth report

As expected, the economy grew more quickly at the beginning of this year than at the end of 2012, according to this morning’s GDP release.  Real GDP was up at a yearly rate of 2.5% over the first quarter, compared to a mere 0.4% in the prior three months.

But only slightly beneath the surface, the report showed continuing weaknesses in the US economy and, consistent with the unexpectedly weak March jobs report, hints at another softening of demand in recent months.  Expectations were for growth above 3% but disposable income, a critical driver of growth in our 70% consumption economy, fell sharply, down 5% in real terms, partly due the loss of the payroll tax break.

The two main factors propelling the economy forward last quarter were firms restocking their shelves (inventory build-up adds to GDP growth) and strong spending by the stalwart American consumer, drawing not on their income but on their savings.  Since the inventory component is both highly volatile and less indicative of current demand, it’s useful to look at final demand, essentially GDP without the inventory build-up.  This measure grew 1.5% in real terms in the first quarter, down from 1.9% in the last quarter.  Again, this less volatile measure tracks demand more closely than the headline number.

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