January 30, 2008
Rapid deceleration in fourth quarter GDP
by EPI economist L. Josh Bivens
Today’s Commerce Department report on gross domestic product (GDP) growth in the fourth quarter of 2007 was highly anticipated, as it would provide a key signal as to whether or not the U.S. economy was headed toward recession.
The results are worrying: growth in the fourth quarter slowed to an anemic 0.6%, down sharply from the 4.9% growth rate of the third quarter and well below the 1.1% “consensus” rate predicted by a survey of forecasting economists. All components of GDP (consumption, investment, net exports, and government spending) grew more slowly in the fourth quarter than they had in the third.
Inventory investments, which boosted the third quarter growth numbers, knocked a full 1.3% off of GDP growth in the fourth quarter. While final sales, a less volatile measure of underlying growth (GDP growth minus the influence of inventory investment), grew at a more encouraging 1.9% in the fourth quarter, this was still down sharply from 4.0% growth in the third quarter.
Consumption grew 2.0% in the fourth quarter, down from 2.8% growth in the third quarter. The ability of U.S. consumers to weather the enormous drop in wealth caused by deflation of the housing bubble remains the single largest threat to the U.S. economy in coming months. While it is a good sign that consumption growth remains positive, previous (monthly) data releases showed much higher consumption growth for October and November, meaning that today’s report implies very slow growth for December. Given the weak December numbers on consumption and yesterday’s release of home price data showing annualized price declines of 7.7% in November, the future growth of consumption spending remains in doubt.
Residential construction fell for the eighth straight quarter, shrinking by 24%—the fastest rate in its downturn. Historically, weak residential construction is followed by a one- to two-year lag with weak non-residential construction. Today’s report is more comforting on this score, as non-residential construction continued a healthy rise (if a bit slower than in the third quarter).
Net exports’ contribution to growth moderated this quarter, adding 0.4% to growth, after averaging a 1.4% boost in both the second and third quarters of 2007. Some of this previous boost was driven by the falling dollar, which made U.S.-based production more competitive in global markets. Absent a reversal of the dollar’s fall, net exports should continue to add to growth in the coming year.
Government spending grew 2.6% in the last three months of the year, with almost all coming from state and local governments (which grew 4.0% relative to 0.3% growth in federal government). Since the majority of states are already experiencing revenue shortfalls, it seems unlikely that state and local government spending will be a strong contributor to growth in the coming year.
Inflation in market-based “core” personal consumption expenditures (excluding food and energy costs) rose 1.9% compared to the same quarter last year. While food and energy inflation is every bit the danger to family budgets as other costs, inflation in food and energy has generally been driven by the supply-side (rising price of energy). This tame measure of core inflation gives the Federal Reserve plenty of room to attack the economic softening without any danger of overheating the economy and setting off broader inflationary pressures.
Today’s report provides plenty to support the view of those concerned about a recession in the coming year. Overall growth decelerated markedly (even accounting for the influence of inventories), all major components of GDP decelerated relative to the third quarter, consumption spending decelerated significantly in December, and the bottom of residential construction spending remains hard to call.
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