First quarter GDP figures were released Wednesday morning. The Wall Street Journal summed up the consensus opinion: "US Economic Growth Nearly Stalls Out".
Here's how GDP growth looks on a year-over-year basis. The headline in WSJ says growth nearly stalled out; the data shows growth of 3.0% (real), the second highest growth rate in the past 5 years.
Part of the story about disappointing GDP growth was that inventories expanded. The next chart therefore strips out the changes in GDP due to inventory. This is a better measure of consumption growth than total GDP. What you see, however, is that real growth excluding inventories was 2.5%, the third highest rate of growth in the past 8 years.
How about the "personal consumption expenditures" part of GDP, the component which accounts for about 70% of GDP? If growth is weak, we would expect it to show up in consumption. In the first quarter, consumption grew 3.0%, the highest growth rate in 5 years.
So, what's going on here? The headlines say that the economy is stalling, yet GDP growth is, by various measures, among the best since the end of the recession.
The difference is timeframe. Instead of focusing on the trend in growth, the headlines focused on the change from the prior quarter. Which way is more useful? The next chart shows the quarter-on-quarter change in GDP growth used in the headlines.
What's apparent is that quarterly growth varies widely, sometimes growing at nearly 5% (annualized) and sometimes contracting (negative growth). There's no trend except that strong quarters follow weak quarters.
And that's exactly what happened in the first quarter of this year. Growth was the strongest in 11 years in the third quarter of 2014, so weaker growth in the recent quarter is not surprising. In fact, it follows a pattern from just last year where first quarter 2014 growth was minus 4% (annualized). That, again, was then followed by the strongest quarterly growth since 2003.
Another apparent pattern is winter weakness. That has been the case every year since the recession ended (arrows).
The point is that economic growth doesn't follow a smooth path. The data is volatile, and this means there is very little that can be learned over short time periods. When we lengthen the time period to cover an annual cycle, the trend is apparent. And, as the charts at the top of this post show, the trend continues to be positive.
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