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Statement by Assistant Secretary for Economic Policy Karen Dynan for the Treasury Borrowing Advisory Committee Of The Securities Industry and Financial Markets Association

(Archived Content)

Real GDP growth slowed in the first quarter of 2016 to an annual rate of 0.5 percent, down from a 2 percent pace over the four quarters of 2015.  However, this slower pace of growth is not expected to persist, with private-sector forecasters anticipating a rebound in the current quarter. Indeed, key underpinnings of domestic demand remain quite favorable.  Most notably, payroll gains were robust in the first quarter, and consumer sentiment remains near pre-recession norms.  In addition, government spending is expected to make a modest positive contribution to growth this year after being neutral last year and a drag on growth over the preceding several years.

GDP Growth in 2016:Q1

Real GDP growth slowed in the first quarter to an annual rate of 0.5 percent from a 1.4 percent annual rate in the fourth quarter of 2015.  Residential investment growth remained brisk, but consumer spending growth moderated as purchases of motor vehicles fell back from near record-high levels at the end of 2015.  In addition, business fixed investment posted a sizable decline, in part reflecting ongoing weakness in spending on structures because of cutbacks in drilling and mining in the wake of the earlier drop in crude oil prices.  Net exports continued to drag on growth amid still-weak demand for U.S. exports, and inventory investment fell further as businesses continued to adjust their stocks in reaction to the unsustainably high levels of inventories reached early last year.

Government spending increased overall in the first quarter, making a positive contribution to growth.  An increase in state and local spending added 0.3 percentage point to real GDP growth, more than offsetting a 0.1 percentage point drag from lower federal sector spending.  State and local spending has been supportive of growth in three of the last four quarters, after several years of mostly scant or negative contributions.  Overall, government spending added 0.2 percentage point to real GDP growth in the first quarter and should be moderately supportive of growth over the year as a whole.

Labor Markets and Productivity

Labor markets remained robust in the first quarter of this year.  Nonfarm payrolls expanded by an average of 209,000 jobs per month, a little below the average of 229,000 for all of last year.  The unemployment rate was 5 percent in March, down from its 2009 peak of 10 percent and a little below its pre-recession average.  Unemployment rates continue to be lowest for those with the most education. For example, the unemployment rate for people with a high school diploma alone is around 5½ percent, while the unemployment rate for those with a college education or more is just 2½ percent.  However, for all education groups, current unemployment rates are about half of what they were at their peak.  Meanwhile, initial claims remain at very low levels, suggesting that layoffs are low and job security has improved.  In addition, the labor force participation rate has risen over the last six months to its highest level in two years as more workers responded to improving labor market conditions by re-entering the labor force. 

With gains in aggregate hours worked outpacing increases in output, nonfarm productivity likely dropped in the first quarter after rising just 0.5 percent during 2015 (the official data will be released on May 4).  Productivity growth can be very volatile from quarter to quarter, but, on average in recent years, it has fallen short of its long-term historical average of 2.1 percent.  Other countries have seen weak productivity growth over this period as well, partly reflecting sluggish capital investment in the wake of the financial crisis and recession.  Over the longer run, productivity growth is a key determinant of how fast real wages and the economy can grow.

Prices and Wages

Consumer price inflation remains moderate.  The Consumer Prices Index (CPI) for all items has increased 0.9 percent over the year ending in March, following no change over the 12-month period leading up to March 2015.  The low rate of inflation partly reflects declines in energy prices.  Energy prices fell 12.4 percent over the year ending in March, with gasoline prices down 21 percent.  Food prices have risen 0.8 percent over the past year, down from a 2.3 percent increase over the preceding year.  Excluding food and energy, consumer prices were 2.2 percent higher this March than a year ago, up from a 1.8 percent rise a year earlier.  Import prices have continued to decline, contributing to the low rate of overall inflation.  Looking ahead, private-sector forecasters expect headline CPI inflation of 1¾ percent over 2016.

Nominal wages and compensation continue to show fairly limited gains.  Nominal hourly earnings for all employees rose 2.3 percent over the year ending in March 2016, up slightly from a 2.2 percent increase over the year-earlier period.  A different measure of nominal wage growth—the Employment Cost Index (ECI) for wages and salaries—rose 2.1 percent over the year ending in March, down from 2.7 percent over the year-earlier period.  The broader ECI total compensation measure, which captures wages and benefits, rose 1.8 percent over the year ending in March, compared with 2.8 percent over the year-earlier period.  Despite the limited gains in nominal wage and compensation measures, workers have seen solid increases in purchasing power because inflation has been low.


While GDP growth slowed in the first quarter, the labor market remains robust and favorable domestic fundamentals should support a rebound to a solid pace of GDP growth for the remainder of the year.  A consensus of private forecasters projects that annualized growth will pick up to between 2¼ percent and 2½ percent for the remaining three quarters of 2016.