1st Quarter US GDP data shows continued deterioration of underlying economic

structure

By John Ross

Media reportage of the 1st quarter US GDP figures has concentrated on the 3.2% annualised
economic growth - a slowdown from an annualised 5.6% in the 4th quarter of 2009. This
'disappointed' markets because, as was correctly pointed out by the Wall Street Journal, not
only was it below most analysts predictions but it was only about half the rate of growth of
the US economy when recovering from previous deep economic recessions.

However, more fundamental than the headline GDP growth figures, and explaining them,
was the clear continuation of the deteriorating structure of US GDP. As is widely known the
US economy is characterised by its extraordinarily high percentage of consumption in GDP,
its lack of saving, and its low level of investment. This led to the theory that as part of the
'rebalancing' of the world economy consumption would fall as a percentage of the US
economy and investment and saving would rise.

As this blog has pointed out in analysing previous US GDP results in fact the exact opposite
is taking place. Consumption is actually rising as a percentage of the US economy and
investment is falling - the overall US savings rate will only be released later although the
latest figures show US household savings falling as a percentage of GDP.

Taking first consumption, the percentage of total consumption, private and government, in
US GDP is shown in Figure 1. As may be seen the proportion of consumption in US GDP has
risen from 85.8% prior to the financial crisis, in the last quarter of 2007, to 88.0% in the first
quarter of 2010.

Figure 1
This 2.2% increase in the share of consumption in US GDP is equally accounted for by
government consumption and personal consumption - both have risen by 1.1% of GDP. The
trend of personal consumption is shown in Figure 2 - US personal consumption rose from
69.9% of GDP to 71.0% of GDP between the last quarter of 2007 and the first quarter of
2010.

Figure 2

The converse of the rising percentage of consumption in US GDP is, of course, a decline in
US investment - shown in Figure 3. Total US fixed investment has fallen from 19.1% of GDP
in the last quarter of 2007 to 15.3% in the 1st quarter of 2010 - the latter figure is the lowest
since the aftermath of World War II.

Figure 3
While the decline in US investment is, as would be expected given the housing crisis,
particularly severe in residential construction a fall has occurred across all categories - as
shown in Figure 4.

Taking the comparison between the last quarter of 2007 and the 1st quarter of 2010,
private non-residential fixed investment has fallen from 11.8% of US GDP to 9.4%, private
residential investment has fallen from an already depressed 3.9% of GDP to 2.4% of GDP
and government investment has declined marginally from 2.4% of GDP to 2.3% of GDP.

Figure 4

The pattern of development of US GDP is clear. Far from consumption falling as a proportion
of the US economy and investment increasing the opposite is occurring - consumption as a
proportion of US GDP is rising further and investment is falling. As investment is the main
medium and long term driver of economic growth the decline in investment limits the
growth potential of the US economy as well as being largely responsible for the slow
recovery from the recession.

The 'slower than previously' recovery of the US from severe downturn is likely to continue

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This article originally appeared on the blog Key Trends in Globalisation on 03 May 2010.