Economic Review & Outlook: Implications for the US

In the first quarter of 2012, the US economy continued its trend of moderate growth, strong enough to prevent a double-dip recession but not so strong as to convince people that the recovery is real and the economy is “out of the woods.”

Recent economic news has done little to promote any degree of certainty in the future. On the one hand, many indicators are moving in an encouraging direction: the unemployment rate is falling, consumer spending continues to grow, and inflation remains stable; on the other hand, the Case-Shiller index, a composite index of the home prices for 20 major Metropolitan Statistical Areas in the United States, continues to fall and the rate at which jobs are created fluctuates. Given these mixed signals and the fact that the recovery has already stalled once, the public’s uncertainty concerning the economy is easy to understand.

First Quarter Growth and Economic Components

In the fourth quarter of 2011, US real GDP grew at a 3.0 percent seasonally adjusted annual rate (SAAR1), accelerating from 1.8 percent in the third quarter. In the first quarter of 2012 it slowed to 2.2 percent growth.

Consumer spending appears to have made a recovery. While overall real GDP growth slowed in the first quarter of 2012, consumer spending growth increased from 1.47 percent in Q4 2011 to 2.04 percent in Q1 2012. This makes for three straight quarters of accelerating growth in this category.

Within consumer spending, major growth categories include motor vehicles and parts (up 28.7 percent), furnishing and durable household equipment (10.4 percent), and recreational goods and vehicles (6.4 percent). Only two sectors did not see positive growth in Q1 2012: gasoline and other energy goods (-4.9 percent) and housing and utilities (-1.9 percent). Both of these declines represent real decreases in consumption and are not an artifact of falling prices. In fact, the price of oil was higher in the first quarter of 2012 ($100.03 per barrel) than in Q4 2011 ($91.57 per barrel).

Government spending fell by three percent in the first quarter of 2012, making it the fifth straight quarter of spending decreases. Much of the decrease comes from defense spending, which fell by 8.1 percent. However, the decrease in spending occurred at all levels, including a 5.6 percent decrease in overall Federal spending and a 1.2 percent decrease in state and local expenditures.

Net exports changed little in the first quarter of 2011, falling by 0.01 percent; Box 2 includes both goods and services.

Business investment, which had shown strong growth in Q4 2011 at 2.59 percent, pulled back in the first quarter of this year to 0.77 percent. The majority of the decline is attributable to a 12 percent decrease in nonresidential fixed investment, which includes new construction of hotels, motels, and mining exploration as well as improvements to existing structures and the net purchase of used structures. On the other hand, fixed residential investment went from 11.6 percent in Q4 2011 to 19.1 percent in Q1 2012.

Historically, a healthy industrial capacity utilization rate for the US has been between 80 and 85 percent; however, while the country had been trending in that direction since July 2009, in recent months industrial capacity utilization has leveled off. While up 2.1 percentage points year-over-year, capacity utilization fell by 0.1 percentage points in February and March of 2012 combined. Further, while capacity utilization is approaching what is considered normal or healthy levels, employment has not bounced back to the same degree.

The housing market, which has been at the center of the economic downturn, is sending mixed signals. Real private residential investment—consisting of purchases of private residential structures and residential equipment that is owned by landlords and rented to tenants—has grown for the past four quarters, something that has not happened since 2005.

Further, while overall investment levels remain depressed, private residential investment growth in Q1 of 2012 reached 4.5 percent. The Case-Shiller Index on the other hand has continued to decline; in February 2012 the Case-Shiller 20-city composite index of home prices fell to its lowest level since late 2002.


US GDP growth in 2011 ended at 1.7 percent compared to three percent in 2010, lower than forecasted but better than what had been feared, given the slowdown in the first half of 2011.

Major economic forecasting entities are predicting GDP growth for 2012 to fall within a fairly narrow range, between 2.1 and 2.4 percent. Forecasts for growth have converged with some agencies lowering their forecasts and others increasing them, with each agency moving closer to the combined mean. Moody’s reduced their forecast by the largest margin, lowering their forecast 1.5 percentage points. The Congressional Budget Office (CBO) also revised their forecast down, but more moderately by 0.4 percentage points. Global Insight and the International Monetary Fund (IMF) boosted their outlooks, raising their forecasts by 0.4 and 0.3 percentage points respectively.

Using a weighted average of Global Insight, IMF, CBO, and Moody’s, GDP growth is expected to remain unchanged between 2012 and 2013 staying around 2.2 percent. Growth is expected to pick up beginning in 2014, peaking in 2015 at around 3.7 percent, and then falling back below three percent in 2017 to a long-term growth rate of around 2.6 percent.

The consensus among economists is that higher growth than this will be needed relative to future population growth in order to effectively reduce unemployment.







While the most recent unemployment numbers were viewed as a disappointment, the trend over the past seven months has been downward. The April 2012 unemployment rate was 8.1 percent, the lowest since February of 2009. However, some of this decrease may be attributed to discouraged workers exiting the job market; in April the number of unemployed fell by 173,000 while the civilian labor force fell by 342,000.

The economy gained 115,000 jobs2 in April 2012 but that is down from the 250,000 plus numbers seen in January and February of this year. This marks the 19th straight month of job gains.

The economy began shedding jobs in February 2008, and over the following 31 months a net of 8.2 million jobs were lost. Starting in October 2010, the recent streak of job growth has added 3.1 million jobs. If job growth continues at that pace, it will take an additional 30 months to regain the lost jobs (October 2014).

In order to reduce unemployment there would need to be additional job growth beyond that to accommodate new workers entering the labor force.


There has been no significant inflation in 2012. The first quarter annual core inflation rate was 2.1 percent, which is easily below the historic three to four percent range and well within the comfort zone of the Federal Reserve.

The Federal Reserve continues to hold the federal funds rate—the interest rate at which depository institutions actively trade balances held at the Federal Reserve with each other, usually overnight, on an uncollateralized basis—at near zero levels: for the month of April it stood at 0.14 percent, near the middle of the official target range of zero to 0.25 percent.

The 10-year US Treasury bond continues to trade at very low rates; January and February of this year saw historic lows of 1.97 percent. After that, rates rose to 2.17 in March and 2.05 in April. They have since dipped again and as of May 21st the rate stood at 1.85 percent.

Fiscal Receipts

According to the latest data from the Rockefeller Institute, state tax collections in Q4 2011 were up 3.6 percent compared to Q4 2010. In nominal terms overall tax collections are now above the peak levels seen prior to the recession. However, once adjusted for inflation, there has been a 3.4 percent decline in state tax receipts nationwide between Q4 2007 and the same quarter in 2011.

Local taxes on the other hand continued to decline year-over-year, slipping by 1.0 percent on average over the past four quarters. While this is far from good it is not as bad as the 2.2 percent decline seen in 2010.

The divergence between state and local tax receipts can largely be explained through the heavy reliance of local governments on property taxes. Property values continue to decline, whereas revenues from income and sales taxes have been increasing. The decline in local tax revenues has placed many counties and municipalities in fiscal crisis. Jefferson County Alabama, for example, recently went into default—not the first county to have done so nor expected to be the last.

Regional Employment

Nevada still leads the country in terms of its unemployment rate (12.0 percent), followed by Rhode Island (11.1 percent), California (11.0 percent), the District of Columbia (9.8 percent), and North Carolina (9.7 percent). Compared to the previous report in which 12 states had unemployment rates exceeding 10 percent, there are now only three. Another good sign is that only two states (New York and New Mexico) saw unemployment rates rise between Q4 2011 and Q1 2012. Both states saw increases of less than 0.25 percent and neither of them ranks in the top 10 in terms of unemployment rates. New York has the 16th highest unemployment (8.5 percent), while New Mexico is 29th (7.2 percent).

While overall employment gains and losses vary widely throughout the country, two trends are starting to emerge.

First, the Sun Belt, which was the engine of the US economy during the early 2000s, continues to experience higher unemployment rates than the rest of the country. The following states all had unemployment rates of nine percent or greater in March 2012: North Carolina, Florida, Georgia, and Mississippi, with South Carolina not far behind at 8.9 percent.

Secondly, the Great Plains states and parts of the Midwest are consistently doing better than the national average: Oklahoma, Wyoming, and Iowa all had unemployment rates of less than six percent. Furthermore, Nebraska, and South and North Dakota all have unemployment rates under five percent (4.0, 4.3 and 3.0 percent, respectively).

Overall, only one state (New York) saw year-over-year increases in unemployment in the first quarter, (0.33 points). The states which saw the largest decreases in unemployment since Q1 2011 were Michigan (-1.93 points), Alabama (-1.77 points), Vermont (-1.57 points), Florida (-1.47 points), and Texas (-1.43 points). An additional 12 other states also saw decreases in unemployment of one percentage point or greater over this same time period.



  1.  All growth rates reported as seasonally adjusted annual rate (SAAR) unless otherwise indicated.
  2.  Jobs numbers refer to the BLS Current Employment Statistics household survey which excludes the self-employed and farm workers. The number of unemployed and the labor force figure are from the BLS Current Population Survey, and include farm workers and the self-employed.


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Geographies: United States
Sectors: Other
Topics: Economics