Consumption and GDP Growth: Moseying into Q2

May 4, 2006 – According to data released last week, U.S. real GDP rose at a strong 4.8% annual rate in Q1 – rebounding from an exceptionally weak 1.7% Q4 increase (Chart 1).[1]

Chart 1. Real GDP growth. Q1 2000 through Q1 2006.

Stronger real growth in consumption, fixed investment, government purchases and net exports all contributed to faster Q1 real GDP growth – partially offset by slower Q1 real inventory growth.

However, the improvement in Q1 consumption growth – which is worth about 70% of U.S. GDP – had the largest GDP impact.

Real consumption rose at a 5.5% annual rate in Q1, after a meager 0.9% Q4 increase (Chart 2).

Chart 1. Real consumption growth. Q1 2000 through Q1 2006.

And, this strong Q1 consumption gain contributed a big 3.8 percentage points to Q1 real GDP growth (+0.6 percentage points in Q4, Chart 3).

Chart 3. Contributions to real GDP growth. Q4 2005 and Q1 2006.

However, according to the monthly data, the trend in consumption growth has slowed in recent months (Chart 4).

Chart 4. Real consumption growth. January 2000 through March 2006.

Real consumption growth averaged 0.2% per month for the three months of Q1 (about a 3% annual rate), compared to 0.6% per month (nearly a 7% annual rate) for the three months of Q4.

If monthly consumption growth were to continue at 0.2% per month from April through June, quarterly consumption growth would slow by about 2.5 percentage points to about a 3% annual rate in Q2. All else the same, that would reduce Q2 real GDP growth by about 2 percentage points (compared to Q1) – putting Q2 real GDP growth at about a 3% annual rate.

Suzanne Rizzo