January 27, 2006

That 4th Quarter 2005 Gross Domestic Product Result

Filed under: Economy,Taxes & Government — Tom @ 10:34 am

Well, at 1.1% it stinks, and if it happens again next quarter, it’s unacceptable. Assuming it doesn’t get revised upwards by a ridiculous amount (if the form of the past couple of years holds, it will end up at 1.5% in March’s final revision), it ends the 10-quarter string of 3%-plus reports. GDP growth for all of 2005 stands at 3.5%.

The result seems incongruous in light of the very good Christmas shopping season (up 8.7% over 2004 — yet “consumers spent less robustly“?) and the Fed’s beige book data that had shown continued strength throughout the quarter, which is why further study is needed. My instincts are telling me to ask “What did they miss?” but I’ll grit my teeth.

Here’s a quick perusal for negatives and unusuals, and there are some:

  • Consumer durables spending down 17.5% — Where are the reports during the quarter that indicated this would happen?
  • Private investment was up 12.2% — This one is always volatile, but the number is a strong positive.
  • Overall spending by the federal government was down 7.0%, including national defense down by 13.1%. Both are by far the biggest drops in the 16 quarters presented in the report going back to 2002. I’m tempted to say “in your dreams” that federal spending would go down so much (again, where’s the indication that this was happening?), and that I’ll take one mediocre quarter of GDP growth in return for this being a permanent condition.

I’m starting to wonder if it’s realistic to expect supply-side econ to overcome the drag of SarBox indefinitely.

But there it is. The revisions will be interesting indeed. I’ll look around for other reax later.
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UPDATE: Another reason to wonder if the initial GDP number is going to get a significant bump-up when revised: “New-Home Sales Climb in Dec., Set Record for 2005″ (a “surprise,” of course)
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Selected Reactions:

  • Angry Bear — “All in all, this is an extremely worrying report. I’ve been bearish about economic growth in 2006 for a little while now, and this has just confirmed my worst fears.”
  • Econbrowser — “The specific details of the latest GDP figures are very discouraging. The strongest growth was right where we don’t want to see it– inventory accumulation contributed 1.45% positive growth to fourth-quarter GDP, meaning that real final sales actually fell. Some inventory accumulation was expected given the big negative inventory investment earlier in the year, but still, it is a bleak quarter indeed if that’s all you’ve got going for you.”
  • Capital Spectator: “No matter how you spin it, a drop to 1% from 4% is something more than trivial. ….. Digging deeper, the stats only get worse, starting with the massive 17.5% fall in durable goods purchases in the fourth quarter–the biggest decline in 18 years.”

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UPDATE, Jan. 28: WSJ reaction (requires subscription)

Financial markets took the news in stride, however, perhaps because the components of the GDP reduction seemed so unusual. A plunge in auto sales accounted for most of the decline from the third quarter’s 4.1% rate, while lower government spending (a silver lining) and a bigger trade deficit due to greater oil imports after Katrina counted for much of the rest. In other words, the dip looks like it could be temporary.

All the more so because January’s growth signals have been strong, especially initial jobless claims, which are below 290,000 on a four-week moving average. Corporations also continue to be flush. Some pessimists will now try to use the fourth-quarter dip to browbeat the Federal Reserve to stop raising interest rates, but that would be a mistake. Friday’s report showed the Fed’s favorite “core” inflation figure (excluding food and energy) rising to 2.2%, above the Fed’s 2% upper threshold. A premature pause now is likely to require even higher rates to contain inflation later.

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