GDP: Good or Fair?
The initial reaction to today’s GDP report has to be positive. The economy grew at an annual rate of 3.2% in the fourth quarter of 2010, up from a revised 2.6% during the third quarter. So the recovery seems secure and well on track. Here is my usual breakdown of the parts of the economy and how much they all contributed to the total:
- Consumption: added +3.0%
- Private Investment: subtracted -3.2%
- Trade: added +3.5%
- Government Spending: subtracted -0.1%
The interesting number here is that consumption figure. Personal spending rose at the sharpest pace for four years, driven particularly by a strong showing in durable goods. This is encouraging because these ‘big ticket’ items are normally easily postponed when households are adjusting their balance sheets and when fears of unemployment prevent people making long term financial commitments. So this gain may be a sign that consumers are feeling better bout the future and might suggest the economy will move ahead well during 2011. Notice all those words like ‘might’ etc. We need to wait and see whether the numbers are not revised downward as better information is analyzed. And we need to see this momentum, if it turns out to be real, maintained throughout the year. Even with all these caveats, the news is good. Sales of services seem stuck in a bit more of a rut and grew at pretty much the same pace as they did all through last year. There has been no acceleration in that sector. So we could easily construct a more negative narrative: consumers postponed their big ticket purchases as long as they could but eventually they were forced to buy – things wear out after all – and the underlying rate of household consumption is closer to the growth rate of services than that of durable goods. Hence the need to wait and see. Incidentally durable goods sales jumped 21.6% from the third to the fourth quarters, hence my mild skepticism about the sustainability of that pace.
The picture in investment was also very distorted. Here it was the run down in inventories that muddled things. Non-farm inventories suddenly shifted into reverse as businesses ran down their stocks during the holiday sales, so after several quarters of helping keep GDP rising, inventories actually knocked a big hole in growth. This change masked a very mild recovery in residential investment which managed to record only its third gain in the last nineteen quarters. Having said that the gain was negligible, but that it existed at all is noteworthy.
Trade too was subject to a big shift. Exports have been recovering quite well for several quarters and continued to rise at a decent rate. But imports suddenly dropped which is why the total impact of trade was so beneficial. Given that worldwide demand for commodities is putting a great deal of pressure on prices I suspect that the trend in imports will turn negative again during the summer. Plus there seems to have been a modest amount of stockpiling of imports during the late summer and early fall which meant importers could reduce their activities subsequently. This too probably shifted the numbers around a bit and so the sharp turn in today’s report may not be representative of a ling term trend.
Lastly, the government spending line is something of a warning. The effects of the stimulus are now well worn down, which leaves us with the increasing drag on GDP caused by the continued, and increasing, austerity at the state government level. This is something to watch. As the austerity hawks gain more control we can expect government spending to taper off somewhat. This will press down on growth and harm our prospects during 2011 and beyond. Today’s report could simply be the beginning of that downward trend.
So, overall, the report is good. Remember it is preliminary and subject to revision. Typically those revisions can be quite large. So keep a large asterisk against this data. Having said that it is good to see GDP running at a rate above 3.0%.
One last thing though: even at this pace we will not work unemployment down very quickly. We lost an enormous amount of GDP activity during the downturn. Had we not had a recession the economy would be about 7% larger than it is today. That’s a lot of jobs. Moreover, at a steady 3.0% rate of growth we would need years – maybe a full decade – to get catch up to where we would have been. So although this is a good report, it isn’t really good enough to get too excited over. We need more rapid growth for a while to make that catch up period more tolerable. There’s not much evidence we will see such an acceleration.
Which means we are in for a long, steady climb, rather than a rapid ascent.
Translation: good, but not quite good enough.
