Looking at the contributions to GDP is very important.
Several factors jump out:
1) There is a roughly 1% swing Q4’08 to Q1’09 in Government spending and investment. This is a major contributor to the low GDP in Q1’09. Had government spending made the same contribution as in Q4’08, the Q1’09 GDP would have declined at an annual rate of roughly only 4.7%.
2) The largest and most interesting factor of all is the shift in gross private domestic investment. The contribution of gross private domestic investment to GDP declined by almost 5% (annualized rate) between Q4’08 and Q1’09. Within this number, two subcomponents are particularly significant: nonresidential investment and inventories. Both contributed significantly to the decline in Q1’09.
3) Consumer spending increased significantly. Whereas consumer spending contributed nearly –3% in Q4’08, in Q1’09 it actually contributed positively to the GDP. The change from one quarter to the other was near 4% (annual rate contribution).
4) Net Exports rose. Whereas net exports were roughly equal to net imports in Q4’08, in Q1’09, exports made a significant positive contribution to GDP.
Based on these factors, I see significant improvement. Falling inventories are one-time adjustments – in the long run, inventory must be repurchased. The fact that real GDP growth accelerated while inventories fell means that the economy’s fundamental health increased by more than the 0.6% difference between Q4’08 and Q1’09. The obvious source of weakness and reason for concern is residential and non-residential investment. To indicate a sustainable recovery, I would look for those areas to improve significantly, while ideally retaining a positive or near-zero contribution of net exports to GDP and for government spending to stay with the +/- 1% band in terms of contribution. The key with government spending is that somehow the federal stimulus roughly offset the massive decline in state and local spending.
I would also look carefully for the non-government savings rate to flatten out. All this money that isn’t being invested in the “gross private domestic investment” as well as earned from exports has to go somewhere. If the savings rate flattens out, then the GDP will not be dragged down by continued unwillingness to spend or invest.
