January 30, 2003
Low growth accompanies record trade deficit
Economic growth decelerated from an annualized 4% in the third quarter to 0.7% in the fourth quarter, the Bureau of Economic Analysis (BEA) reported today in its advance release of gross domestic product (GDP) data. The decline in economic growth was accompanied by a marked slowdown in consumption growth, and a rise by the trade deficit to a record high. However, government spending continued to increase and investment finally grew again, thereby keeping economic growth from falling further.
Consumer spending grew a mere 1% in the fourth quarter-its lowest rate in almost ten years. It was the weakest fourth-quarter growth in consumer spending since 1991. The slow growth in consumption was driven by a decline in consumer durables, such as cars and household appliances. Consumer durables had grown by a remarkable 22.7% in the third quarter. This pattern reflects the “robbing-from-Peter-to-pay-Paul” mechanism that has characterized durable goods markets recently: third-quarter growth was driven by low-interest financing, which pulled into the third quarter consumption that otherwise probably would have occurred in the fourth quarter. Consumer spending on non-durable goods, such as food and clothing, rose by 3.9%, up from 1% in the third quarter.
The housing sector regained its strength after sluggish growth in the third quarter of 2002. Household expenditures for new home purchases, home construction and renovation grew by 6.8%, after having risen only 1.1% in the third quarter.
For the first time, the U.S. trade deficit rose above an annualized rate of $500 billion in real terms, or a record 4.3% of GDP. The weak external performance was due to both declining exports and faster import growth: export growth fell to -1.7% in the fourth quarter from 4.6% in the third quarter, while import growth accelerated slightly to 3.7% from 3.3%.
The continued swelling of the trade deficit raises further doubts about U.S. financial stability, since it requires increased borrowing from overseas and thus, with a rise in the overall debt owed to foreigners, a growing debt service obligation. These worries have already led to a decline in the dollar. Since February 2002, the dollar fell by 3.4% against a broad index of U.S. trading partners’ currencies. Against just major currencies, such as the euro and yen, the dollar fell by 9.1%. Although a falling dollar makes our exports cheaper and our imports more expensive, it will take about 12 to 18 months before a falling dollar results in an improving trade deficit, largely because production capacities cannot be changed quickly.
Business investment in the fourth quarter grew again for the first time in two years, apparently having bottomed out in the third quarter. After eight quarters of decline, it rose in the fourth quarter by 1.5%, driven by continued growth in equipment and software investment. However, business spending on structures fell 9.3%, a continuing decline—albeit at a slower pace—following the third quarter’s 21.4% fall.
Federal government spending grew strongly again, after taking a breather in the third quarter. After growing by only 4.3% in the third quarter, federal spending increased 10.1% in the fourth, led upward by an 11.2% increase in defense spending. Budget woes at the level of state and local governments kept their spending growth at a low 1.7%, down from 2.2% in the third quarter.
Overall, the U.S. economic recovery lost steam in the fourth quarter, increasing the need for a quick and sufficiently large economic stimulus. Worries over the low growth rate are being compounded by growing uncertainty, in light of the record-high trade deficit, about U.S. economic stability.
—by Christian Weller
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