The most recent release of quarterly real GDP numbers on April 27, 2012 (first estimate) revealed that real GDP growth dropped to 2.2% from the revised fourth quarter value of 3.0%. Clearly, economists and government officials were hopeful of more substantial growth so that an acceleration of output expansion could be perceived. However, the evidence is clear that the rate of growth was actually slowed primarily by cuts in government spending (particularly at the state and local level, but compounded by federal government funding declines) and increases in net imports. For all of 2011 real GDP growth was eight tenths to 1.3% below traditionally desired levels in expansion, and well below the 5% that historically would have been necessary to reduce unemployment significantly; at an anemic 1.7%. As we mentioned last quarter, by historical comparisons, it is actually surprising that unemployment fell even after seasonal adjustment during 2011.4 given the very low real GDP advances.The April release of the 2012.1 data implied that “the increase in real GDP in the first quarter primarily reflected positive contributions from personal consumption expenditures (PCE), exports, private inventory investment, and residential fixed investment that were partly offset by negative contributions from federal government spending, nonresidential fixed investment, and state and local government spending. Imports, which are a subtraction in the calculation of GDP, increased. The deceleration in real GDP in the first quarter primarily reflected a deceleration in private inventory investment and a downturn in nonresidential fixed investment that were partly offset by accelerations in PCE and in exports.” Read ArticleLast quarter we revealed that the Federal Reserve is definitely concerned about the slow real GDP growth and the causes of fourth quarter deceleration (Dr. Mason provides insight for the directors of the Jacksonville Branch of the Atlanta Federal Reserve through questions provided by the FED). Virtually all of the questions in the May FED query were about capital investment by firms in the local area. In aggregate, investment is the most volatile component in GDP. But recently, structure investment has been very weak and has dragged down overall growth (see line 10 in the Table below). Firms locally and nationally are still reluctant to expand capacity given the political and global uncertainty, and growth of output and employment is suffering as a result.
Table 1.1.1. Percent Change From Preceding Period in Real Gross Domestic Product[Percent] Seasonally adjusted at annual ratesLast Revised on: April 27, 2012 - Next Release Date May 31, 2012
Gross domestic product
Personal consumption expenditures
Gross private domestic investment
Equipment and software
Change in private inventories
Net exports of goods and services
Government consumption expenditures and gross investment
State and local
Gross domestic product, current dollars
A January 2012 article in CNNMoney indicated that states and local governments shed a quarter of a million jobs in 2011 and that almost 660,000 state and local government jobs have been lost since mid-2008. The latter number of jobs added back to the ranks of the employed would cut the unemployment rate nationwide by four tenths of one percent to 7.7%. The Table above reveals this in line 25, with every quarter but one since 2010.1 indicating this decline in state and local government spending overall. As we noted last quarter, despite all of the job-growth related political claims, government sector employment has fallen over the last three years as the recovery began. This is not necessarily a bad thing if the cuts reflect true improvements in efficiency and these former employees find jobs in the private sector. However, cutting teachers from schools with classroom size mandates as we have in Florida, combined with reductions in university payrolls by instituting larger classes taught by part-time instructors instead of permanent faculty seems less than optimal. The government can claim they are becoming more efficient and creating jobs, but they may or may not be doing the former, and they are clearly destroying jobs in aggregate. The private sector is not only the primary source for job creation presently, but this is generally the case relative to long-lasting and superior jobs! Inflation remains muted due to slower than preferred growth combined with reluctance on the part of producers to try to pass on higher prices for fear of loss of market share to competitors. The automobile industry is growing again and car sales have been brisk (both used and new), but prices have not risen much and when they do they tend to fall back the very next month. Food prices have grown very little so far in 2012 and while gasoline prices rose in January through early March, they have finally trended downward during the last six weeks or so. In the last two months the housing market has rebounded some with prices and sales rising. Housing drove real GDP growth in the 2002-06 time periods. Nobody anticipates similar growth in the near future (or likely prefers it given the bubble effects that decimated the economy), but positive movement in this sector could go a long way towards improving household wealth and motivations by consumers to spend, and employers to hire. Thereafter we will see rising prices, rising interest rates (both real and nominal), and hopefully, rising output growth.
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