Good and Bad Signs in the GDP Reading

by: Ron Haruni

The Commerce Department said Friday gross domestic product, the output of goods and services produced by labor and property located in the U.S., fell at an annual rate of 6.2% in the fourth quarter, adjusted for inflation, even lower than the consensus expected 5.4% contraction. It is the deepest decline since the first quarter of FY1982. The government’s “advance” reading last month estimated the drop in fourth-quarter GDP at a 3.8% rate with expectations for a 6.0% decline. Real GDP is now down 0.8% on a YOY basis.

According to the “preliminary” report, the main GDP drivers were revised downward, with the largest adjustments to exports, personal consumption expenditures for non-durable goods, equipment and software, and residential fixed investment.

- Real exports of goods and services, until recently one of the few elements that kept GDP in positive territory while supporting an economy in distress, decreased at a 23.6% rate (-1.8% YOY basis) in the fourth quarter, in contrast to an increase of 3.0% in the third. It is the steepest decline since FY1971 as economic troubles overseas continue to shrink demand for domestic goods and services. Meanwhile, imports, which are a subtraction in the calculation of GDP, decreased at a 16.0% rate (-7.1% YOY basis).

- Real personal consumption, which accounts for more than 70% of domestic economic activity, fell at a 4.3% annual rate, compared with a decrease of 3.8% in the third, the biggest fall since the second quarter of 1980. The rate of decline however, is in our view unsustainable.

- On a somewhat positive note, inventories, added only 0.16 percentage points to real GDP growth in Q4, versus an original estimate of 1.3. This news is a bit optimistic (only minimally) in the sense that it suggests that the involuntary inventory accumulation was smaller than previously estimated. Businesses cut inventories by $19.9 billion in the fourth quarter, following a decrease of $29.6 billion in the previous quarter and a decrease of $50.6 billion in the second. In its advance GDP report, the Bureau of Economic Analysis [BEA] said business inventories increased by $6.2 billion.

- Businesses cut spending on equipment and software at an annualized rate of 28.85% in the fourth quarter, compared with a decrease of 7.5% in the third, reflecting a significant spending reduction.

- Spending on motor vehicles output subtracted 2.04 percentage points from the fourth-quarter, declining at a frightening 38.0% annual rate, which was 1.4 percentage points faster than the 26.6% decline logged in the third quarter.

Finally, the home building component was the exception to the downward adjustments. It subtracted 0.8 percentage points from real GDP rather than the prior estimate of -0.9. Nonresidential fixed investment decreased 21.1% in the fourth quarter, followed by a 22.2% annual rate decline in the real residential fixed investment category.

The preliminary estimate of the 4Q change in real GDP is $74.4 billion lower than the advance estimate issued by BEA last month.

The Bureau of Economic Analysis is expected to report its final reading on fourth-quarter GDP on March 26.