WASHINGTON - The economy continued to expand at a moderate pace in early 2012, and labor market conditions improved. The rate of hiring accelerated and the unemployment rate continued to decline, although it remains elevated at 8.2 percent. The improvement in the job market, along with continued moderate growth in consumption, signs of a modest recovery in the housing sector, and strong gains in equity markets have contributed to a somewhat brighter near-term outlook since the beginning of the year. A consensus of private forecasters expects growth to strengthen gradually going forward, although forecasters expect additional progress in reducing the unemployment rate further this year to be limited. Notwithstanding these bright spots, we remain concerned about the potential risks posed by high oil prices, sovereign debt strains in Europe, and the slowdown in global growth more broadly. The Administration has proposed a number of measures to support the U.S. economy in the near term, including providing additional funding for jobs and training programs, further opportunities for underwater mortgage-holders to refinance their loans at lower interest rates, and incentives for small businesses to promote a faster pace of job creation. These short-term initiatives would not jeopardize longer-term efforts to rein in the federal deficit. The federal budget deficit is projected to decline as a share of the economy in FY2012 to 8.5 percent of GDP from 8.7 percent in FY2012, and narrow significantly thereafter to less than 3 percent of GDP by the end of the decade.
According to the advance GDP report released last week, the economy grew by 2.2 percent at an annual rate in the first quarter, the eleventh straight quarter of growth since the recession ended in June 2009. Since the recovery began, the economy has grown by nearly 7 percent, lifting real GDP 1.3 percent above its peak at the end of 2007, when the recession began. Real GDP growth during the first quarter mainly reflected a pickup in consumer spending, residential investment, and exports. Personal consumption expenditures advanced 2.9 percent in the latest quarter, accelerating from a 2.1 percent pace in Q4, and contributing more than 2 percentage points to growth. Building on a very solid 11.6 percent advance in the final quarter of last year, residential investment jumped 19.1 percent in the first quarter of 2012, adding nearly one-half percentage point to real GDP growth. Export growth picked up smartly to a 5.4 percent annual rate, but that was roughly offset by a similar rise in imports. As a result, net exports were essentially neutral for GDP growth after shaving one-quarter percentage point off of growth in the fourth quarter. Business investment, which has been an important source of strength throughout the recovery, was a small drag on activity in early 2011, as growth of equipment and software outlays moderated and nonresidential structures spending declined. In addition, the pace of private inventory accumulation slowed sharply, and the contribution to growth from inventory investment fell to 0.6 percentage point from 1.8 percentage points in Q4. Government spending remained a large drag on the economy in the first quarter, subtracting 0.6 percentage point from GDP growth. Private domestic final purchases (the sum of consumption, business fixed investment, and residential investment) continued to grow at a solid 2.7 percent annual rate in the first quarter. The persistent strength of underlying private demand, even as near-term fiscal support for the recovery declines, is a sign that private sector economic fundamentals continue to improve.
In the labor market, the pace of job creation has accelerated over the past several months. The private sector created an average 210,000 jobs per month in the first quarter of this year, up from 184,000 per month in Q4, and 148,000 per month in Q3. In 2011, more than 2.1 million jobs were added to private-sector payrolls – that was the largest annual increase in private sector employment since 2005. Since the employment low of February 2010, the private sector has created 4.1 million jobs through March 2012. The recent stabilization in state and local hiring is particularly encouraging. After losing jobs in each of the past 13 quarters, state and local governments added to payrolls in Q1. The unemployment rate fell to 8.2 percent in March, its lowest level in three years, and further progress has also been made in reducing the rates of long-term unemployment as well as marginal attachment to the labor force and part-time employment for economic reasons. Importantly, the average workweek and average hourly earnings continue to rise, and there has been a substantial improvement in job openings and labor turnover.
Although overall the housing sector remains depressed, favorable signs continue to emerge, prompting many private-sector forecasters to predict a possible flattening-out of home prices this year. Housing starts and existing home sales advanced in each of the last three quarters. Even though the inventory of existing homes for sale remains relatively high, it continues to decline and homebuilder confidence, though still exceptionally low, has improved. Home prices have shown signs of stabilization recently: the Federal Housing Financing Agency’s Purchase-Only House Price Index rose by more than expected in February and also posted its first year-over-year increase since July 2007. Although other house price measures continued to fall compared to a year earlier, the pace of decline appears to be slowing. While we remain concerned about the large stock of homes in the foreclosure pipeline, we are also encouraged by positive signs on the demand side, particularly a much better-than-expected pick-up in pending home sales, which has been accompanied by record housing affordability.
There are downside risks to the outlook, for our own economy as well as abroad. Headwinds at home include the relatively high level of oil prices, even after very recent declines, and the impact on inflation and attendant erosion of real wages. State and local government finances are improving, but remain constrained, and additional fiscal consolidation measures will be necessary at the federal level over the medium term. The near-term expiration of emergency and extended unemployment benefits for many of the unemployed, due in part to recent legislative changes and to declines in unemployment rates in some states below stipulated thresholds, will remove an important support for consumption at a time when the national unemployment rate remains far too high. In addition, the onset of recession in some parts of Europe will likely reduce demand for U.S. exports. Concerns also persist over the slowdown in global economic growth and the potential for further financial problems in the Eurozone.
Over the longer term, significant additional fiscal consolidation measures will be necessary to put the federal budget on a more sustainable path. This Administration is committed to reducing the deficit by more than $4 trillion over the next ten years through a balanced approach, including the $1 trillion in discretionary spending reductions enacted last year. The proposed deficit reduction measures in combination with stronger economic growth will cut the deficit to less than 3 percent of GDP by FY2018, at which point the primary deficit will be eliminated. This is a significant achievement, because the elimination of the primary deficit – receipts less outlays, excluding net interest – means that spending will no longer be adding to the national debt burden for future generations.
U.S. economic conditions continue to firm and growth is expected to strengthen gradually in the near term. The Administration remains firmly committed to maintaining the recovery’s forward momentum even as we make the prudent choices necessary to safeguard our future fiscal health. The President’s proposals in the American Jobs Act are a notably good example of the kind of carefully crafted, near-term spending programs for job creation and training that will help put more Americans back to work and as a result, boost incomes, tax revenues, and growth, while laying the groundwork for long-term productivity and competitiveness.