Mixed Signals: Weaker Growth, Higher Profits
The U.S. economy lost some steam during the first three months of the year. The Commerce Department said Friday that growth slowed to just 2.2 percent, down from 3 percent at the end of last year.
The good news was that the economy continued to grow during the first quarter of the year. But anyone who was waiting for growth to kick into a higher gear was disappointed once again. One reason for that was a slowdown in business investment — companies spent less on new equipment and software even though profits were surprisingly strong.
Beth Ann Bovino, deputy chief economist at Standard and Poor's, says the latest report "continues to show that this recovery is very half-speed. At least it's positive, but it's certainly very weak."
Still, there were some surprises in the report. Consumers spent more than expected, partly because they dipped into their savings. But businesses cut back, and they did so at a time when many corporations were making lots of money. So far, 72 percent of companies in the Standard & Poor's 500 index that have released first-quarter numbers had better-than-expected earnings. But Bovino says they held on to a lot of the cash they earned.
"One of the jokes that I've had is that businesses have been able to take about 20 pounds of work and put it into a 10-pound bag," she says. "They're keeping their costs lean and certainly that's helping with profits."
The drop-off in business investment is troubling because corporate spending has been one of the bright spots in the economy over the past two years. Brian Bethune, a professor of economics at Amherst College, says business spending helped compensate for the sharp drop in government spending. He says federal, state and local governments have been cutting back and laying people off for several years, a trend that continued in the first quarter of this year in part because of a decline in defense spending.
"We need the business sector to grow at above potential rates to offset that," Bethune says, "and that's the concern at this point — can this business sector really continue to crank out growth rates in excess of potential in order to keep the economy going?"
That's a question the Federal Reserve is wrestling with. According to Bethune, Fed policymakers have sent mixed signals lately about how strong the economy is, and that sent interest rates climbing. But the weaker-than-expected March jobs report helped reverse that trend and Friday's GDP report sent rates falling even further.
"The good thing is that interest rates have come back down again so we're going to see mortgage rates move back down to record lows," Bethune says. "That's very helpful for the housing market."
The trouble is that while mortgage rates have spent much of the past three years at historic lows, housing prices have never recovered.
Friday's report is one more headache for the Obama administration, which is already sailing toward the November elections with an albatross of a tepid economy around its neck. A White House spokesman has cautioned against putting too much weight into a single report. He also pointed out that the economy has enjoyed 11 consecutive quarters of growth, a sign that it's moving in the right direction. But, he said, the president understands there's quite a bit more work to do.