Weaker GDP growth based on a number of factors

GDP advanced at a respectable 3.1% annualized pace in Q4 but slowed considerably according to advanced data provided by the U.S. Commerce Department, growing just 1.8% in Q1.

Real final sales, which measures GDP less changes in private inventories, increased a scant 0.8%, versus a robust 6.7% in the final three months of 2010.

The table below looks at key components of GDP and how they contributed to or detracted from the economy last quarter and in Q4 per government data.

As an example, consumer spending contributed 2.8 percentage points to the 3.1% rise in GDP in Q4 and 1.9 percentage points in Q1. Weakness in other components translated into growth of just 1.8%.

	Q4’10	Q1’11
GDP	3.1	1.8
Consumer Spending	2.8	1.9
Change in Inventories	-3.42	0.93
Exports	1.06	0.64
Imports	2.21	-0.72
Govt. Spending	-0.34	-1.09
Residential construction	0.07	-0.09

The huge swing in inventories lent support to GDP in Q1, as companies lifted output following a big drawdown in Q4, but a large rise in imports detracted from overall economic performance.

Diminished consumer confidence and rising gasoline prices also appeared to pressure consumer spending despite the payroll tax cut that was enacted by Congress late last year.

Housing’s diminished role in the economy had very little impact (see Housing – losing its importance as economic driver).

Today’s report is not the final say on growth last quarter, as we have two more revisions that will incorporate updated information on trade, inventories and spending.

If there is a silver lining to today’s report, the outsized jump in imports played a key part in the feeble GDP number, but one can’t discount the anxiety consumers are feeling.

Needless to say, Q1 was a disappointment and is a stark reminder that a recovery that follows a recession caused by a financial crisis is typically slow and uneven.

Unfortunately, the uptick in weekly jobless claims and recent modest gains in the bond market suggest the slowdown is continuing into Q2.  Strength in the stock market, however, suggests the weakness we are seeing is temporary.