Fourth Quarter GDP: Worse Than it Looks

Excerpt from Raymond James Economist Dr. Scott Brown's latest economic commentary:

The headline GDP figure was boosted by an increase in inventories in the fourth quarter. To refresh your memory from Econ 1, inventories are a stock and GDP is a flow. The change in inventories is a component of the level of GDP (both are flows). Therefore, it’s the change in the change in inventories that contributes to GDP growth. Inflation-adjusted inventories fell at a $29.6 billion annual rate in 3Q08 and rose at a $6.2 billion pace in 4Q08 – the difference added 1.3 percentage points to the headline GDP figure.

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Exports plunged at a 19.7% annual rate in 4Q08, subtracting 2.8 percentage points from GDP. Imports (which have a negative sign in the GDP calculation) fell 15.7%, adding 2.9 percentage points to growth. Falling imports and falling exports are not a good sign for the U.S. and global economies. As terrible as the recent economic data have been in the U.S., it’s bad or worse just about everywhere else.

More unsettling are the declines in consumer spending and business investment in the fourth quarter. Consumer spending fell at a 3.5% annual rate (vs. -3.8% in 3Q08), while business spending on equipment and software dove at a 27.8% pace (vs. -7.5% in 3Q08).