United States Gross Domestic Product expanded at a 3.2 percent pace in quarter one of 2010, according to the preliminary estimate released today. This was very close to our forecast of 3.1 percent. This expansion was the result of 3.6% growth in personal consumption expenditures and a $50 billion increase in real private inventory spending, even though disposable income did not see a measurable increase. Fixed Investment growth was essentially flat at 0.7 percent growth. This is because the expansion in equipment and software investment was offset by declines in both residential and commercial real estate investment.

Government consumption and investment expenditures declined by 1.8 percent, driven by a 3.8 percent decline in State and Local Government. Federal Government expenditures, both defense and non-defense, were up modestly. (State and Local Government expenditures are 60 percent of Government spending.)

Exports grew about six percent while imports grew about nine percent.

This press release is based on preliminary data and will be revised. However, it appears to indicate a few things:

• Residential real estate investment is not out of the woods yet
• Commercial real estate investment is also not out of the woods yet
• The strength of consumption and the weakness in disposable personal income imply that the savings rate is falling. This has at least a few implications:
o If the household sector does not rebuild its balance sheet future spending will be weak
o The decline in the quantity of loanable-funds, other factors being equal, would contribute to a rise in interest rates. This does not necessarily imply that rates will rise, as this is just one of many factors impacting interest rates at this time.
o Household default rates and personal bankruptcies will remain high
• In contrast to the fourth quarter of 2009 where trade boosted the economy, trade was a drag on the economy in the first quarter of 2010
• It is difficult for the Federal Government to spend enough to offset the declines in State and Local government spending, thus negating the Federal Keynesian-style fiscal expansion policy