What 3.2 Percent GDP Growth Says About Our Contradictory Economy

The Commerce Department's announcement that the U.S. economy grew at an annual rate of 3.2 percent during the first quarter has touched off a veritable mixed bag of reactions. "Stocks Slip as GDP, Sentiment Disappoint," CNBC glumly declared in an early-morning headline. Meanwhile, the Washington Post called the statistic "evidence that the economic recovery continues to plug along but that growth is not accelerating in a way that would bring down joblessness rapidly." The Wall Street Journal was far more upbeat: "The U.S. economy grew briskly in the first quarter, driven by businesses stocking up on goods for a strengthening consumer demand stoked by the lowest core inflation number in 51 years," it said. 

These divergent viewpoints raise a number of fundamental questions. Namely, are we all talking about the same economy? And if so, how can growth be brisk, disappointing, and mediocre all at once?

The good. One of the bigger stories coming out of the Commerce Department's report is the uptick in consumer spending, which grew at an annual rate of 3.6 percent in the first quarter. This compares favorably to the 1.6 percent increase during the last quarter of 2009 and represents the largest expansion since 2007. "The most encouraging news in the report was the strong growth of key types of private spending by consumers," Christina Romer, the chair of President Barack Obama's Council of Economic Advisers, wrote in a blog post.

Since the economy has now grown for three consecutive quarters, analysts and politicians are also optimistic about the likelihood that a sustainable trend is settling in. "After the single biggest economic crisis in our lifetimes, we're heading in the right direction," Obama said on Friday, "We're moving forward. Our economy is stronger; that economic heartbeat is growing stronger."

Meanwhile, even a slowly expanding U.S. economy can provide support for the stock market. That's particularly true when coupled with recent news that China's GDP is expected to surge by 10 percent this year, offering key opportunities to the growing pool of U.S. companies that are looking abroad for profits. "Moderate growth in the United States coupled with 10 percent growth in China is great for the U.S. stock market," says Peter Morici, a professor at the University of Maryland's Robert H. Smith School of Business.

The bad. Still, moderate growth is "simply not enough to bring down unemployment," says Morici. As a result, the unemployment rate, which currently sits at 9.7 percent and appears unlikely to budge in any significant way until employer confidence rebounds, remains perhaps the biggest impediment to a full-out recovery. Obama acknowledged this on Friday, conceding that, "'You're hired' is the only economic news [Americans] are waiting to hear."

[See Why the Unemployment Rate Refuses to Budge.]

Also discouraging is the decreasing pace of growth. Notably, the first quarter's 3.2 percent growth rate is down from 5.6 percent for the last three months of 2009. "We're still far from running on all cylinders," says Diane Swonk, the chief economist at the Chicago-based firm Mesirow Financial. "As good as it is to get 3.2 percent growth, given the losses we've seen we should be seeing several multiples of that at this stage of the game."

A final cause for skepticism is the anemic housing sector, which took a beating during the first quarter. Overall, residential fixed investment, which is primarily a measure of construction projects, contracted at an annual rate of nearly 11 percent.

The mediocre. While economic expansion is usually cause for at least muted celebration among policymakers, GDP is a backward-looking indicator. With sovereign debt crises looming and financial reform—and the uncertainty it can inject into the market—on the horizon, the economy faces a number of immediate hurdles not captured in a single quarterly growth report. "It's reflective of where we've been, not of where we're going," says Swonk.

Another roadblock, says Swonk, is that the burgeoning consumer spending levels cannot be sustained without more robust job growth. "The consumer is struggling to do the best that it can, and the numbers look really good on the surface. But the reality is you can't expect this consumer to carry the expansion, nor should you," she says. "At the end of the day, I think we can take some solace in the fact that the recovery continues, but without jobs, [sustainability is] a problem."