GDP Numbers Come In Lower Than Expected: There’s A Reason Why

What appeared to be a good data point this morning, turned out on further analysis to be anything but that. Fourth quarter GDP declined at a seasonally adjusted annual rate of 3.8%. Economists had suggested the decline would be in the 5.5% range. The fly in the ointment was inventories which increased by $6.2 billion and likely added 1.32% to GDP.

Here is what the WSJ had to say (I copied more than usual since some of you don’t have a subscription):

Inventories increased by $6.2 billion in the fourth quarter, after going down $29.6 billion in the third quarter and $50.6 billion in the second quarter. The climb added 1.32 percentage points to GDP. Real final sales of domestic product, which is GDP less the change in private inventories, decreased 5.1% in the fourth quarter, after falling by 1.3% in the third quarter.

“Obviously, with final demand declining at a 5.1% annualized rate, an increase in inventories is hardly good news for future economic conditions,” MFR Inc. analyst Joshua Shapiro said. “It signals that businesses were unable to reduce inventories to desired levels as demand evaporated. This means that orders and production will sink even more as inventory control and final demand both weigh on activity.” 

With the recession deepening, inflation seems to be disappearing. Gauges with the GDP data that measure prices were way down. For instance, the price index for personal consumption expenditures dropped by 5.5% after increasing 5.0% in the third quarter. Energy prices have fallen sharply since last summer. But the PCE price gauge excluding food and energy also softened, rising 0.6% in the fourth quarter, after increasing 2.4% in the third quarter.

Consumer spending as a percentage of the economy fell off a cliff.

Consumer spending’s share of GDP was 63% in the fourth quarter; it was 71% in the third quarter. Whatever the percentage, the spending of Americans is vital to the state of the economy. Sung Won Sohn, an economics professor at California State University, said massive fiscal stimulus is needed “as soon as possible to slow the downward spiral.”

“With accelerating layoffs, continuing credit crunch and plunging confidence, there is little likelihood that consumer spending will revive anytime soon,” he said. “Consumers will retrench and try to save a bigger portion of the shrinking pie.”

There is the paradox. A large part of the current crisis is due to over consumption yet the cure that economists seem to be prescribing is to return to the disease. They want the consumer to go back to those old profligate ways. I heard a talking head on CNBC this morning who was holding forth in this manner. When challenged his response was something along the lines that we need consumers to start spending like they had in the past but after that happened then we had to change and start saving more. Believe me, I did not make that up. My imagination is not that vivid.

For economist’s takes on the numbers you might want to visit the WSJ Real Times Economics blog. Here are two of the more interesting comments:

  • Almost all the overshoot in GDP relative to consensus was in the inventory component; final sales fell at a 5.1% rate, with consumption down 3.5% and [business spending] on equipment and software down a massive 27.8% (biggest drop in 50 years) both worse than we expected. Net trade was much better than we expected, adding a hard-to-fathom 0.1% to growth; the BEA must have assumed much better December numbers than us. The big mystery, though, is the $6.2B rise in inventories, which bears no resemblance the monthly numbers. It makes us more bearish for the first quarter because this rise has to reverse in some size. In short, we are not comforted. –Ian Shepherdson, High Frequency Economics
  • While the measured U.S. growth declinein the fourth quarter may be one of the smaller drops across the world (when measured the same way), falling prices, incomes and plunging investment should leave no one complacent. Some progress in rebalancing demand and production is being made, but the fourth quarter data will not be the last quarter of severe weakness. –Steven Wieting, Citigroup
  • I don’t think you can take a whole lot of positives out of the numbers. It could have been worse may be the best thing that could be said at this point.


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