US economy (measured by real GDP) grew by 0.6% in the Q1 of 2008. With all the dire predictions about slowing economy and recessions, the growth officially indicates that the economy is not in recession. (NBER defines recession as two successive quarters of negative growth).
But the current growth is not good news if you look at the components. My favorite book on Macroeconomics by Mankiw defines national income as
Y = C + I + G + NX
C is consumption
I is private investment
G is Government spending and investment
NX is Net exports
The U.S. Department of commerce report for Q1 2008 gives us the components of the 0.6% growth
Consumption grew 0.68%, Investments grew by -0.7%, Governmental component grew by 0.39% and Net exports grew by 0.22. On the surface it may look like a growth dominated by consumer spending but if you drill down the private Investment growth number, Inventories, an important component of private investments grew by 0.81%. This means manufacturers are storing more of what they produced in the shelves as the consumer demand weakened.
When excess supply over demand goes into inventory, manufacturers are bound to cut production and hiring. This means higher unemployment rate will follow that will lead to reduction in consumer spending and cause the national income to fall.
A growth caused by unexpected build up of inventory is not a good growth. If we take away private inventory growth component, the economy shrank by 0.4%. As the manufacturers readjust to cut production and reduce the inventory, brace yourself for a negative growth and unemployment.
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