May 2006

Real GDP Growth Rebounds

Real GDP growth surged in the first quarter, following sluggish growth in the preceding quarter. Job growth continued in April, but at a somewhat slower pace than in earlier months. The consumer and housing sectors have cooled in recent months, but the business sector has heated up. Leading measures of core inflation posted troublingly high one-month rates in March, but their 12-month averages remain around 2 percent.

GDP Growth Rebounded in First Quarter
Real gross domestic product (GDP) grew at a 4.8 percent annual rate, according to the April 28 report by the Bureau of Economic Analysis (Chart 1). The strong growth reflected a rebound from the preceding quarter’s weakness, in which GDP grew at a sluggish 1.7 percent rate. Final sales, which equal GDP minus inventory accumulation, registered an even more impressive comeback, posting a 5.4 percent annual growth rate in the first quarter after edging up at a 0.2 percent rate in the preceding quarter.

Job Growth Continues in April, but at a Slower Pace
Nonfarm payrolls added 138,000 jobs in April, marking 32 consecutive months of job growth (Chart 2). The pace of growth was, however, off from the average of 175,000 recorded in the four preceding months. The unemployment rate, computed from the household employment survey, remained at 4.7 percent in April.

Consumer and Housing Sectors Cool, but Business Sector Heats Up
Excluding volatile auto purchases, real personal consumption expenditures (PCE) rose 0.2 percent in March, after increasing 0.3 percent in February and 0.5 percent in January (Chart 3). While consumers are continuing to spend, the pace of growth has slowed from earlier months. Although April real PCE will not be reported until May 26, early evidence suggests that this pattern continued; nominal retail sales, excluding autos and gasoline, rose a modest 0.2 percent in April.

March data on residential construction activity provided further evidence that the housing market is cooling, as permits fell 6 percent and starts fell 8 percent. Permits, starts, existing-home sales and new-home sales are all below the peaks they attained last year. Rates on 30-year fixed-rate mortgages have risen almost half a percentage point since January.

While consumer spending and housing have cooled, business investment has picked up steam. Real business investment surged at a 14 percent annual rate in the first quarter. Evidence of continuing strength in the business sector is provided by the monthly data on nominal orders for nondefense capital goods, excluding aircraft. Nominal orders for these core capital goods rose 4 percent in March and were up 13 percent from a year earlier (Chart 4).

Core Inflation High in March, but Restrained on 12-Month Basis
Three price indexes are often used to track core, or trend, inflation. One is the Consumer Price Index (CPI), excluding the volatile food and energy components. Another is the personal consumption expenditures (PCE) price index, excluding food and energy. The third is the U.S. Trimmed-Mean PCE Inflation Rate, developed by Jim Dolmas of the Federal Reserve Bank of Dallas, which removes extreme (upward or downward) price changes from each month’s PCE index, regardless of which goods or services are involved.

Over the last 12 months, core inflation has been close to 2 percent, according to each of these measures (Chart 5). All three indexes did, however, rise rapidly in March, posting annual growth rates of around 4 percent.

• The ex-food-and-energy CPI rose at a 4.2 percent annual rate in March, after rising at a 1.8 percent rate in February and a 2.4 percent rate in January.
• The ex-food-and-energy PCE price index rose at a 3.9 percent annual rate in March, after rising at a 1.6 percent rate in February and a 2.1 percent rate in January.
• The U.S. trimmed-mean PCE inflation rate rose at a 3.7 percent annual rate in March, after climbing at a 1.8 percent rate in February and a 3.1 percent rate in January.

Future monthly data will provide more information on whether, or to what extent, energy price increases are passing through into core inflation.

—Alan D. Viard