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TheStreet Open House

Economy Slows in First Quarter; Weaker Jobs Growth Likely

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

NEW YORK (TheStreet) -- The economy grew at a 3% annual rate in the fourth quarter of 2011, but first half growth is likely to disappoint, renewing upward pressures on unemployment.

Fourth quarter growth was powered by stronger consumer spending -- especially on autos, substantial additions to business inventories, and stronger multifamily home construction. In the first quarter, gains in consumer spending continued, but outpaced income growth. However, unlike the boom years of the last decade, households are not able to refinance credit card debt and auto loans by further mortgaging their homes, and consumers simply have to slow down soon.

In addition, nonresidential construction spending has been disappointing. Whereas construction, overall, contributed positively to GDP growth in the fourth quarter of 2011, it will subtract in first quarter of 2012.


The economy will register growth at about 2.2% the first quarter and then slack off in the second quarter to well below 2%. The second half should see growth just above two%, and hardly enough to bring down unemployment. Those trends should continue into 2012.

Household incomes have simply not been growing rapidly enough to sustain the recent surge in consumer spending. Although the consumption component of GDP will be strong the first quarter, too much of that was tapped off to pay for imported oil through higher gas prices, and that will drag on GDP through the trade balance.

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Moreover, the surge in hiring from December through February was not matched by strong improvements in wages, and if gas prices in the range of $4 a gallon continue, those will markedly affect consumer behavior through the spring and into the summer.

Recent data for new hiring and rising unemployment claims indicates the jobs market is cooling again, and that will further dampen household income growth and consumption. New hiring will be barely sufficient to accommodate labor force growth, and certainly well below the 360,000 new jobs needed each month to pull down unemployment to 6% over three years.

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