April 29, 2009 (GDP Byte)
Fall in Investment Leads GDP Drop
By David Rosnick
April 29, 2009
Data shows collapse in nonresidential real estate.
Real GDP fell at a 6.1 annualized percent rate in the first quarter of 2009, following a large downward revision for the fourth quarter of 2008 from -3.8 percent to -6.4 percent. This two-quarter fall in real GDP marks the largest two-quarter decline in economic activity in 50 years, driven by the largest fall in investment since 1949.
The fall in GDP was led by an annualized 51.8 percent fall in private investment. For the second straight quarter, there was a fall in every category of investment except farm inventories. The decline in investment cost 8.83 percentage points of GDP growth, primarily in nonresidential fixed investment which fell at a 37.9 percent annual rate, and changes in private inventories, which accounted for nearly one-third of the overall decline in investment. Sustained declines in equipment and software (-33.8 percent) in the first quarter are joined by accelerating losses in nonresidential structures (-44.2 percent). Nonresidential structures had been an important contributor to growth in the previous two years, adding half a percentage point to growth, but structures alone removed 2.13 percentage points of growth in the first quarter of 2009 – likely the beginning of the end of the nonresidential real estate boom. The collapse of the housing bubble also continues to take a toll on the economy as residential investment fell at a 38.0 percent rate, contributing -1.36 percentage points to the 8.83 point decline.
Personal consumption rose in the first quarter of 2009, led by motor vehicles (20.5 percent) and parts as well as household electricity and gas (20.5 percent). The bounce in auto sales follows six quarters of accelerating declines but in large part is due to the inventory declines as motor vehicle output removed 1.36 percentage points of growth from the economy. With GM announcing large plant and dealer closings, future increases in consumption of autos are likely to factor even more into imports and less in domestic output.
Both imports and exports fell by large amounts in the quarter (34.1 and 30.0 percent, respectively). This improvement in the balance of trade contributed 1.99 percentage points to GDP growth. Also making a positive impact on growth were personal consumption expenditures, adding 1.50 percentage points. Government expenditures fell at a 3.9 percent annual rate. As predicted in January, state and local governments continue to tighten their belts as revenues fall, accounting for more than half the fall in government expenditures. On the federal side, non-defense expenditures grew at an annual 1.3 percent rate in the quarter, partially reflecting the large (15.3 percent annualized rate) increase in pre-election spending over the fourth quarter of 2008.
With house prices falling at a rate of 20 percent per year nationally, the economy losing hundreds of thousands of jobs every month, and a Congress seemingly determined to take back from the budget what it gave in stimulus, it is not clear how consumption growth will be sustained.
David Rosnick is an economist at the Center for Economic and Policy Research. CEPR’s GDP Byte is published quarterly upon release of the Bureau of Economic Analysis' report on the Gross Domestic Product.