R We Having a U Shaped Recovery ?

On April 30, the Bureau of Economic Analysis released its first estimate of first quarter real GDP. Typically, the first estimate is revised a lot in the two follow up estimates, but it is still useful as the first nearly complete snapshot we have of the economy this year.

First quarter real GDP rose by 3.2% (annual rate), a big slowdown from the 4th quarter (5.6%). The growth rate was slightly below market consensus, but it looked pretty good. Consumer spending (some two-thirds of growth) accelerated at the fastest pace since early 2007, and investment (equipment) was sustained at an ok rate.

Less thrilling (and recoveries are almost never straight forward, except in hindsight), business and household real estate spending was pretty negative. Exports (touted as a likely source of job recovery) were very disappointing. Government spending remained weak at the federal level (the stimulus contribution has peaked. At the state level, tightening fiscal conditions translated into spending declines, the fifth time in the past 6 quarters.

Three quarters into positive growth territory, the recovery looks more U-shaped now. Growth is improving and looks as though it is becoming self-sustaining now, but the pick up is so far slower than previous strong recoveries. The economy has still not returned to its pre-crisis peak (at the end of 2007), as the graph below shows. Plus, the unemployment problem is probably here to stay for awhile.