Daniel Gross

First Quarter GDP Growth: The Consumer Is Back, Austerity Bites

On Friday morning we got our first look at the government's estimate for economic growth in the first quarter of 2012. The Commerce Department reported that the economy grew at a 2.2 percent annual rate in the first quarter. That's something of a disappointment, given that growth was higher in the fourth quarter of 2011, and that forecasters like Macroeconomic Advisers are pegging current quarter growth at about 3 percent. But the report did contain some optimistic news on the consumer and housing, as well as some negative news on the government.

This isn't the last word on first quarter GDP. Far from it. As the government notes, "The Bureau emphasized that the first quarter advance estimate released today is based on source data that are incomplete or are subject to further revision by the source agency." A second estimate will be released in May and the third, final report will come out in July. And it's likely that the numbers will be revised upwards.

On its face, however, the report is a bummer. But there's some good news embedded in the report about the U.S. consumer, who accounts for 70 percent of economic activity. In an age of deleveraging, consumers have been wary of taking on new debt and spending. And that has held back economic growth. In its quarterly GDP reports, the Bureau of Economic Analysis breaks down how much each sector of the economy grew and how much it contributed to, or subtracted from, economic growth. Check out Table 1 in the Commerce Department report. It shows that "personal consumption expenditures" fell 1.9 percent in 2009 but grew a muted 2 percent in 2010 and 2.2 percent in 2011. But in the first quarter of 2012, personal consumption expenditures grew at a 2.9 percent annual rate. In 2011, growth in personal consumption expenditures accounted for 1.54 percentage points of the 1.7 percentage points of economic growth. In the first quarter of 2012, they contributed 2.04 percentage points to the overall growth rate of 2.2 percent. Translation: The level of consumer activity is rising and driving growth to a much greater degree than it was last year.

In my column Thursday, I discussed the ways in which housing had finally started to make a contribution to economic growth in 2011. Table 2 shows that residential fixed investment, a major drag on growth in 2009 and 2010, is on the rise. In the second quarter of 2011, residential fixed investment began contributing modestly to growth. But in the first quarter of 2012, residential fixed investment added .40 percentage points to the growth rate.

So consumer spending and housing — the two biggest economic buzzkills of recent years — accounted for all of the growth in the first quarter and then some. The economy grew at a 2.2 percent annual rate, while personal consumption and housing added 2.44 percentage points to economic growth. So why didn't the economy grow more rapidly? Blame it on the government.

Every quarter, some sectors give and others take away. The U.S. has generally congratulated itself for avoiding the type of self-defeating austerity measures that have been commonplace in the euro zone. The federal government hasn't raised taxes in the past few years. But it has reduced spending. And states and cities, which generally aren't permitted to run deficits, have engaged in European-style austerity campaigns.

So in 2011, declines in government consumption sapped economic growth by .44 percentage points. But in the first quarter of 2012, contraction in the government sector took a bigger bite out of growth—subtracting .6 percentage points from the growth rate. And it's not because Republicans in Congress pushed through tough cuts in social spending. No, a decline in defense spending accounted for most of that reduction.

When the jobs numbers come out, we talk about the "conservative recovery." For the past two years, the private sector has consistently added jobs while the public sector has cut them. Now the economy at large is experiencing something similar. The private sector, fueled once again by consumers and housing, is growing at a decent clip. But the government is now acting as a drag on economic growth.

Daniel Gross is economics editor at Yahoo! Finance.

Follow him on Twitter @grossdm; email him at grossdaniel11@yahoo.com.

His book Better, Stronger, Faster: The Myth of American Decline and the Rise of a New Economy, will be published in May.

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