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First-Quarter GDP Shows Sharp Gain Over Q4

The nation's economy rose at a seasonally adjusted annual rate of 2.5 percent in the first quarter, slightly slower than economists had expected but more than six times the growth rate in the fourth quarter, the ""Bureau of Economic Analysis"":http://bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm (BEA) reported Friday. Economists surveyed by Bloomberg had expected gross domestic product (GDP) to grow at a 3.1 percent pace.

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Still, the relatively strong growth meant the economy met and overcame two significant challenges: the end of the two-year payroll tax holiday as of January 1, which cost most wage earners $1,000 for the entire year; and, as of March 1, the beginning of the federal budget sequester that reduced federal spending. Government spending has been tied to GDP growth.

Government spending jumped in last year├â┬ó├óÔÇÜ┬¼├óÔÇ×┬ós third quarter with a corresponding increase in GDP--its strongest quarter of the year. When government spending dropped in Q4, so did GDP.

The reduction in take-home pay didn't stop consumers, either. Personal consumption spending rose 3.2 percent in the first quarter compared with a 1.8 percent boost in the fourth quarter. Government spending was a drag on growth, subtracting 0.8 percent from GDP as the effects of sequestration began to kick in. That impact could be deeper in the second quarter, which will--absent any budget deal in Washington--reflect three months of sequester cuts, not just one.

The sequester cuts took effect automatically per an agreement between the White House and Congress tied to increasing the federal government's debt ceiling. They were designed to be draconian in an effort to compel both sides to act on a deficit reduction plan before the effective date. Neither side blinked.

Most of the initial sequester cuts had little direct impact but in the past week, the Federal Aviation Administration began furloughs of air traffic controllers to meet its lower budget, resulting in flight delays across the country. Cuts at other agencies are likely to have similar direct impact.

By the numbers, GDP rose $84.7 billion in the first quarter to $13.75 trillion.

GDP itself, the broadest measure of the economy, is the sum of consumer spending, investment and government spending, less net exports.

Consumer spending accounted for most of the increase--$76.1 billion. All in, personal consumption expenditures represented 70.8 percent of GDP in the first quarter. Investment--including residential and non-residential structures--added another $56.7 billion, while next exports and government spending subtracted from growth.

Residential fixed investment added $11.8 billion to GDP, down from the $15.3 billion contribution in the fourth quarter, and spending on non-residential structures actually subtracted from GDP, albeit a scant $200 million.

Inventory investment accounted for most of the increase in total investment, $37 billion.

Government spending fell $25.5 billion in the first quarter--most of it at the federal level--after having dropped $45 billion in the fourth quarter. By way of comparison, government spending in the first quarter of 2012 fell a modest $4.3 billion.

Federal government spending fell $21.7 billion in the first quarter compared with a drop of $600 million in the first quarter of 2012.

BEA issues three GDP reports for each quarter. Friday's report is considered the ""advance"" report and relies on estimates of data elements not yet tallied or reported. BEA said it makes assumptions for source data not available in time for development of the GDP report issued less than a month after the end of the quarter. It also relies on ""preliminary"" data subject to revision for some of the February data included in the GDP report.

Specifically, BEA said only two months of data were available for several key data sources, and it assumed an increase in nondurable manufacturing inventories, an increase in merchant wholesale and retail inventories, an increase in exports of goods, excluding gold, and a decrease in imports of goods, excluding gold.

Once actual data are received for those elements, the GDP number will change.

For the fourth quarter, BEA's advance GDP report showed the economy had contracted 0.1 percent, but the final report showed the economy indeed grew, albeit by just 0.4 percent--the weakest growth rate since the first quarter of 2011. The 2.5 percent growth rate for the first quarter, while better than the fourth quarter, is slower than the 3.1 percent growth rate in the third quarter of 2012. In the first quarter last year, the economy grew 2.0 percent.

The overall assessment of the first quarter could be gauged by employment statistics. In the fourth quarter, the nation's payrolls grew 626,000, according to the Bureau of Labor Statistics, but in the first quarter, payrolls grew 504,000.

While the end of the payroll tax reduction--the deduction for Social Security contributions was lowered to 4.25 percent from 6.25 percent in both 2011 and 2012--was expected to reduce consumer spending, consumers countered by saving less. Personal savings as a percentage of disposable personal income fell to 2.6 percent in the first quarter from 4.1 percent in the fourth.

Residential fixed investment as a share of total GDP rose slightly in the first quarter to 2.89 percent from 2.83 percent in the fourth.

The personal consumption price index--an alternate measure of inflation watched closely by the Federal Reserve--showed a 2.0 percent inflation rate in the last year compared with 1.8 percent in the fourth quarter. The core inflation rate--excluding more volatile food and energy prices--fell to 1.2 percent in the first quarter from 1.6 percent in the fourth.

The inflation measures take on added significance as the Federal Reserve said it would look to two measures--the unemployment rate and the inflation rate--to determine when to raise interest rates.

_Hear Mark Lieberman next Friday on P.O.T.U.S. radio, Sirius-XM 124, at 8:45 a.m. Eastern time._

About Author: Mark Lieberman

Mark Lieberman is the former Senior Economist at Fox Business Network. He is now Managing Director and Senior Economist at Economics Analytics Research. He can be heard each Friday on The Morning Briefing on POTUS on Sirius-XM Radio 124.
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