The big item that these economists (and therefore reporters) missed in the first quarter GDP was the reason for the 2.2 percent increase in consumption. Many pointed to this rise as an increase in consumer confidence. Okay, so how does this increase in confidence fit with the rise in the savings rate from 3.2 percent to 4.2 percent? That won't work for most definitions of 3.2 percent and 4.2 percent. Higher consumption can't be explained by rising income either. Income fell in the first quarter. So, where does higher consumption come from? The answer to the mystery is lower taxes and higher transfers, most importantly the big cost of living increase in Social Security payments that seniors got this year. (The cost of living adjustment is based on the 3rd quarter CPI compared with the prior year. This included the run-up in gas prices, but not the subsequent fall.) Anyhow, chalk the failure to see this as yet another big miss for the economists who missed the housing bubble. Btw, many also got the inventory story wrong also. Inventories will not keep falling and in fact will likely increase in subsequent quarters. That is good news for the economies of Japan and China and other major exporters. The bulk of the increase in inventories will be met by imports, not domestic production. In other words, inventories will not be the force that turns around the U.S. economy.
--Dean Baker
