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Weekly Economic Commentary


2012:Q1 GDP – Although the Headline Suggests Moderate Growth, Details Show Pockets of Strength

April 27, 2012

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Real GDP of the U.S economy grew at an annual rate of 2.2% in the first quarter of 2012, after a 3.0% increase in the fourth quarter.  The large increase in inventories ($52.2 billion in 2011:Q4vs. -$2.0 billion in 2011:Q3) in the fourth quarter helped to boost the headline.  Excluding inventories, final sales advanced only 1.1% in the fourth quarter of 2011.  Final sales in 2012:Q2 advanced 1.6%, implying that demand was stronger in the first quarter of 2012 vs. the final three months of 2011. 

Chart 1

dec 042712 chart 1 

Consumer spending grew 2.9% in first quarter, the largest increase since fourth quarter of 2010.  Purchases of both goods (6.2% vs. +5.4% in 2011:Q4) and services (+1.2% vs. 0.4% in 2011:Q4) advanced in the first quarter. 

Chart 2

dec 042712 chart 2

dec 042712 chart 2
Real disposable income increased a paltry 0.4% pace in the first quarter and the year-to-year gains are unimpressive (see Chart 3). Going forward, stronger growth in real disposable income will be necessary to support the pace of consumer spending seen in the first quarter.  Saving as a percent of disposable income declined to 3.9% in the first quarter from 4.5% in the fourth quarter.  The saving rate has held between 5.2% and 5.4% during 2008-2010, followed by a 4.7% average in 2011. 

Chart 3

dec 042712 chart 3
Equipment and software spending rose only 1.7% in the first quarter, the smallest gain in the entire recovery (see Chart 4).  Given the excess capacity in the economy, it is unlikely that businesses will put in place a robust investment plan in 2012. 

Chart 4

dec 042712 chart 4

Residential investment expenditures rose at an annual rate of 19.1% in the first quarter, after an 11.6% increase in the prior quarter.  These are solid readings and the strongest for the recovery, excluding the wide swings seen in 2009-10 that were related to the first-time home buyer program (see Chart 5).  Is the performance of the last six months durable?  It should if the pace of hiring advances at a rapid clip.

Chart 5

dec 042712 chart 5
Exports grew at an annual rate of 5.4% in the first, a noticeable improvement in the third quarter, but a far cry from the double digit gains posted during 2009-2010.  Given soft economic conditions in Europe and a decelerating pace of activity in Asia, it is unlikely that exports will make a strong positive contribution to GDP growth in 2012. 

Chart 6

dec 042712 chart 6
The personal consumption expenditure price index (the Fed’s preferred measure) rose at an annual rate of 2.4% in the first quarter. The year-to-year increase at 2.3% represents a deceleration from a high of 2.9% in the third quarter of 2011.  The core personal consumption expenditure price index (which excludes food and energy) moved up 1.9% in the first quarter, the largest increase in this recovery.  These inflation readings are well within the range that is consistent with price stability and do not present an imminent threat.

Chart 7

dec 042712 chart 7
The Fed projects moderate growth followed by a “gradual pickup” in economic growth and inflation readings that stay within the bounds of price stability.  The first quarter GDP numbers are consistent with the Fed’s forecast, for now.  The U.S. economy is most likely to grow at a 2.5% pace in the second quarter, followed by a stronger performance in the second half of 2012.  The April 24-25 FOMC meeting concluded with the Fed maintaining the forward guidance of a low federal funds rate until late 2014.  Bernanke kept the door open for additional monetary policy accommodation by reiterating that the Fed will step in if economic conditions weaken or if inflation numbers come in below the level consistent with price stability. 


 dec 042712 chart 8a

The opinions expressed herein are those of the author and do not necessarily represent the views of The Northern Trust Company. The Northern Trust Company does not warrant the accuracy or completeness of information contained herein, such information is subject to change and is not intended to influence your investment decisions.