U.S. GDP Growth Moderates As Lift From Inventories Fades

A slower rate of inventory replenishment was warranted because products weren't leaving the shelves quickly. As a result, real GDP growth eased last quarter to 3.2% after the 5.6% jump during 4Q '09. The latest roughly matched Consensus expectations for 3.4% growth. Regardless, it was the third consecutive quarter of positive growth after the recession when GDP fell 3.7% peak-to-trough, a postwar record.

The addition to growth from inventories fell to 1.6 percentage points which was roughly half the 4Q add. Inventories also helped the economy initially emerge from recession with a moderate 0.7 contribution to 3Q '09 GDP growth. Prior to these additions, inventory liquidation had subtracted from GDP growth since 2005, a length of time unprecedented in postwar history.

Growth in domestic final demand picked up last quarter to a still-modest 2.2% after 1.4% 4Q growth. These rates compare to up to 9.0% in the early stages of earlier economic recoveries. Last quarter's improvement was due to consumer spending growth of 3.6% after 1.6% 4Q growth. Motor vehicle purchases fell for the second straight quarter (+1.4% y/y) but spending on other consumer durables and clothing (2.1% y/y) jumped. Spending on services also improved (1.1% y/y). Fixed business investment growth remained moderate at 4.0% compared to double-digit growth early in past recoveries. Equipment spending surged 13.4% (6.9% y/y) offset by a 14.0% decline (-17.0% y/y) in structures. With an on again-off again pattern, residential investment fell 10.9% after just two quarters of positive growth. Finally, government spending fell at a 1.8% rate as budget cutbacks caused state & local spending to fall (-0.7% y/y) for the fifth time in the last six quarters.

Deterioration in the foreign trade deficit subtracted 0.6 percentage points from last quarter's gain in GDP. It was the second negative effect in the last three quarters. Growth in exports of 5.8% (10.1% y/y) was much lower than during prior two quarters. In addition import growth of 8.9% (6.9% y/y) was reduced from double-digit rates in 3Q & 4Q '09.

Price inflation remained low at 0.9% as measured by the chained GDP price index. The y/y gain of just 0.4% was the lowest since the early-1950s. The personal consumption chain price index rose a reduced 1.5% but year-to-year prices increased an improved 2.0%, the quickest since 2008. The price index for fixed business investment fell 1.7% (-3.0% y/y), the fifth consecutive quarterly decline, but the residential investment price index rose for the second consecutive quarter (-1.0% y/y).