There are all sorts of terrifying ways to interpret Thursday’s first-cut report by the Commerce Department that gross domestic product growth slowed to 1.8 percent in the first quarter of this year. The liberal Economic Policy Institute warns that growth isn’t strong enough to bring the unemployment rate down. The conservative Americans for Limited Government says America is witnessing "stagflation ala the 1970s."
Most economists have a more sober take, best summed up in the words of 1990s hip-hop sensation C&C Music Factory: "Chill baby, baby—wait."
Yes, the top-line GDP number is grim, especially compared to the near-4 percent growth forecasters originally predicted. It’s the lowest GDP gain since the second quarter of 2010, when ripples from the Greek debt crisis put the brakes on what had been an accelerating U.S. recovery, and it’s clear many Americans worry they’re watching a repeat slowdown.
More importantly, though, is how easily explained this disappointing GDP number is—and how much it reflects the influence of what Fed Chairman Ben Bernanke likes to call "transitory" factors, aka, things that will hopefully go away soon.
Growth fell short this quarter because the Middle East erupted in protests, sending gasoline prices soaring; because governments at every level intensified their budget cutting, especially in federal defense spending; and because the housing market continues to drag on the economy like a boulder tied to a rear bumper.
There’s evidence that all those factors could improve over the rest of the year. Bernanke expects the Middle East to cool down, eventually, and for the higher cost of fuel not to drive up core prices of goods and services dramatically, a view shared by many Wall Street analysts.
Budget-cutting isn’t over in Washington by a long shot, but most forecasters said on Thursday they expect defense spending at least to rebound from the 0.7 percent hit it inflicted on GDP in the first quarter. Existing home sales posted surprisingly decent growth for March, giving analysts a glimmer of hope that sales could keep trending up through the year.
At the same time, other core components of growth came in strong enough this quarter to buoy upcoming growth projections. Real consumer spending was up at a 2.7 annual rate, which beat expectations. Equipment purchases are still roaring, suggesting the industrial backbone of the recovery isn’t weakening.
"The fundamentals still seem like they are shifting towards stronger growth," University of North Carolina economist Karl Smith wrote Thursday on his popular blog, Modeled Behavior. "We are not seeing depressed personal consumption expenditures. We are not seeing industrial production stall out. We are not seeing [zero] new investment in equipment and software."
Nomura analysts were equally cheered: "Looking ahead," they wrote, "we believe that GDP growth will accelerate in the coming quarters as … temporary factors are fading."
There’s a time and place for economic panic, of course, and today that place is across the pond. The United Kingdom also posted its first-quarter growth figures this week. The GDP rate? A whopping 0.5 percent.