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The economy hit a speed bump in the first quarter. Advance estimates of Q1’11 GDP, released on Thursday by the Bureau of Economic Analysis, showed the economy expanding at an annualized rate of just 1.8 percent. That’s down from a much healthier 3.1 percent in Q4’10 and below economists’ projections in the range of 2.0 percent to 2.2 percent.

On the surface, the GDP report is worrisome because it implies a rate of growth that is insufficient to power significantly stronger job growth. But upon closer scrutiny, it’s apparent that key contributors to a self-sustaining recovery held up reasonably well. In particular, personal consumption added 1.9 percentage points to the GDP result, the second highest contribution since before the recession. Business investment also held up, adding 1.0 percentage point to the GDP result and signaling that businesses were generally undaunted by the last few months’ astonishing geo-political events.

In contrast with relatively healthy consumer and business activity, drags on the economy followed from a broad contraction in federal, state and local government spending and from a further drop in investment in non-residential buildings. Imports picked up, as well, appearing as a subtraction from growth in the GDP accounting.

In context, the headwinds to growth underscore the importance of righting the nation’s balance sheet after decades of mismanagement. The drop in governments’ contribution to growth corresponds with a requisite downshift in public spending at all levels. In fact, if federal and state governments are to tackle their serious fiscal imbalances in a meaningful way, we can expect they will remain drags on the economy for some time. It’s tough but necessary medicine.

The weakness in non-residential building – consistent with data on construction spending – also bodes well for the property sectors. While it indicates that developers and lenders generally remain hesitant in evaluating opportunities outside of the multifamily sector, medium-term constraints on supply will allow for a more durable recovery in fundamentals in many markets.

There are certainly markets and submarkets where supply constraints are already exerting upward pressure on occupancy rates and rents in the office, retail, and industrial sectors, and where projects can be undertaken selectively. But this is not the case across the national landscape measured in the GDP accounts. Given the tentativeness of the labor market recovery thus far, holstering new construction at the national level is the safer bet by far.

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