April 30, 2008 
Summary
Nonresidential fixed investment declined 2.5 percent in the first quarter of 2008, compared to a 6 percent increase in the previous quarter, according to the April 30 U.S. Commerce Department’s quarterly report on the nation’s gross domestic product (GDP). This is the largest quarterly decline since the beginning of 2004 when nonresidential fixed investment dipped 2.6 percent. In addition, residential fixed investment experienced a staggering 26.7 percent decrease, subtracting 1.2 percentage points from first quarter GDP growth. Personal consumption grew a modest 1 percent, the slowest quarterly performance since the second quarter of 2001. The two brightest spots in the report were inventories, which were positive for growth in the first quarter after being significantly negative during the fourth quarter of 2007, and exports, which were up 5.5 percent on an annualized basis.
Overall, real GDP increased an annualized 0.6 percent in the first quarter of 2008 from the previous quarter. Although GDP growth for the past two quarters has been weak, the 0.6 percent increase in the first quarter was better than the 0.2 percent consensus expectation. Indeed, as weak as the economy has been recently, it has yet to register a negative growth quarter. The last time GDP shrank was in the third quarter of 2001.
What This Means
According to Associated Builders and Contractors, the first quarter GDP release does little to resolve the question of whether the U.S. economy is now in recession or not, especially because these numbers are subject to revision. For those in the commercial and industrial construction industry, the debate on whether the country is in a recession is of little consequence. What does matter is that the economy is no longer as supportive to commercial and industrial construction activities as it was during prior quarters. The credit crunch that began last summer appears to have slowed the pace of project starts significantly, and other indicators, such as the architectural billings index, support the notion that commercial and industrial construction’s near-term prospects remain dimmer than they have been in years.
However, the credit crunch appears to be ending which could bolster the industry’s fortunes as 2009 nears, though the broader economy still needs to recover from its current malaise. A combination of fiscal and monetary stimuli may prove to be enough to accomplish that over the next two quarters. The quarter-point rate cut today by the Federal Open Market Committee, which reduced the federal funds rate from 2.25 percent to 2 percent, is yet another indication of the concern regarding near-term economic prospects. The federal funds rate is now at its lowest level since late 2004.