The Economy Slows Down
The economy has slowed much more dramatically than most experts expected. Fourth Quarter GDP growth came in at a surprisingly weak 1.1%. Most predictions had been in the range of 2.7 to 3.0%. The Commerce Department news release is here: Department of Commerce News Release on Fourth Quarter
The decline in consumer spending on durable goods [down 17.5%] is especially sharp and reflects the shifting around between quarters that goes on when car makers change their incentive programs. I doubt whether the fourth quarter would have been so weak, nor the earlier quarters so strong had it not been for the shifting of demand casued by those incentives. Still the fading of the economy is now evident. Even the ‘good’ news in the fourth quarter: the build up in business inventories, is not welcome since it probably means that sales were slower than business expected and as a result they will cut inventories in the first quarter. Thus the strong point at the end of last year produces a drag in the start of this.
Also: the slowdown in housing is beginning to bite. Durable goods spending is highly correlated to house construction. With unsold home inventories steadily rising, and home prices not yet adjusted down fully, we can expect the housing market to continue is weakening trend, and thus to restrict growth in personal consumption. Remember that personal consumption accounts for two-thirds of the U.S. economy.
So consumer spending will be the key to 2006. The question that now arises is whether Americans are willing to keep on bingeing beyond their means, as they have for the past few years, or are we now seeing the onset of a more conservative spending pattern. If the latter is the answer then other parts of the economy, like business investment, will have to be very strong to make up for the slackening consumer sector. If those other areas start to ease also then GDP growth will remain poor all year.
A weakening economy will bring to the fore questions about those massive deficits. Weak GDP growth means poorer tax revenues and a climbing Federal Deficit, but it also means a smaller trade imbalance.
At any rate the outlook for the upcoming year is now a lot more cloudy than anyone seriously expected. Welcome to the Fed. Dr. Bernanke!
