GDP = Going Downhill Precipitously

by Dirk van Dijk

In the 4th quarter, real GDP fell at a seasonally adjusted annual rate of 6.2%, a far worse showing than the initial estimate of a 3.8% decline. This follows a 0.5% decline in the 3rd quarter. This is the worst showing since the 3rd quarter of 1982. Nominal GDP fell at an annualized rate of 5.8% -- the worst decline since the government started releasing GDP on a quarterly basis back in 1947.

Since different parts of GDP are very different sizes, the analysis below is based on the number of points of growth the category added or subtracted from GDP, rather than the percentage change, unless otherwise noted. The graph below shows the year-over-year change in both real and nominal GDP, and reflects the positive growth in the first half of 2008. Thus it does not look quite as ugly as the 4th quarter numbers do on their own.

The biggest drag on GDP was Personal Consumption Expenditures (PCE), otherwise known as consumer spending. That subtracted 3.01 points from growth -- worse than the 2.75% drag it exerted on the 3rd quarter. PCE has 3 sub-categories; spending on Durable Goods -- like cars and furniture -- subtracted 1.67 points, mostly due to a 1.13 point drag from autos.

Non-Durable goods spending also fell, subtracting 1.95 points, following a 1.57 point drag in the 3rd quarter. Surprisingly, most of this drag came from lower spending on food, which subtracted 1.53 points following a 0.75 point drag in the 3rd quarter. You know things are tough when the fall in spending on food has almost as much of a negative impact on the economy as spending on autos.

Some of that is likely from people going out to eat at restaurants less and eating at home more, and also from people trading down to the generic store brands from the more expensive name brands. This is not good news for the Restaurant chains -- especially, I suspect, the mid-range firms like Darden (DRI) and Brinker (EAT).

Let us hope that it is not from lots of people going hungry, although some of it probably is. The decline in food spending was offset somewhat by a 0.28 point addition from increased spending on gasoline and other energy. This is a reversal of 6-straight quarters where energy spending was a drag on GDP growth, including a 0.45% drag in the 3rd quarter. This is not something to be very happy about.

Spending on the 3rd sub-category of PCE, Services, actually added to GDP by 0.61 points, reversing a minor 0.03 point drag in the 3rd quarter. The biggest contributors in this area were increased spending on Health Care and on Electricity & Natural Gas. Again, not areas that indicate much increase in the well-being but rather the relentless rise in the cost of health care and some rebound in energy costs (and colder-than-normal temperatures) in the 4th quarter after energy prices collapsed in the 3rd quarter.

The next big part of GDP is Gross Private Investment (GPI). The Residential Investment (RI) sub-category, mostly new housing, subtracted 0.78 points from growth in the 4th quarter, following a 0.60 drag in the 3rd quarter. This marks the 12th-straight quarter that residential investment has been a drag on GDP. The size of the drag is somewhat surprising given that it has shrunk to just 3.09% of the overall GDP -- down from 4.07% in the 4th quarter of 2007.

Given the decline in both the housing starts and the building permits data, look for RI to continue to be a drag on GDP. In some senses, this is a good thing, since the huge inventory of empty houses needs to be cleared out before the housing market can regain its footing. Building more new houses now is economic stupidity. When you find yourself in a hole, stop digging (new foundations).

Non-Residential Investment (NRI) is broadly broken down into 2 parts -- spending on structures like office buildings and shopping malls, and spending on Equipment and Software (E&S). Overall, NRI subtracted 2.48 points following a 0.19 point drag in the 3rd quarter. Spending on Non-residential structures was a drag of 0.24 points in the 4th quarter, a reversal of the 0.36 point addition to growth in the 3rd quarter.

This is the first time that non-residential structures has been a drag on growth since the 3rd quarter of 2005. It will, however, not be the last. We know that Architectural billings fell off a cliff in 2008, and if Architects were not busy in 2008, then it is a lead-pipe cinch that Construction workers will not be busy in 2009.

The real swing however in NRI came from E&S, which subtracted 2.24 points from growth, a dramatic deterioration from the 0.19 point drag it exerted in the 3rd quarter. Within this category, the biggest drags were in Computers and Software, which subtracted 0.97 points, which is not good news for firms like Intel (INTC) and Microsoft (MSFT), and in transportation equipment, which subtracted 0.76 points. This indicates very weak demand for companies like Paccar (PCAR).

Both Imports and Exports fell. Declining imports add to GDP, while declining exports hurt GDP. The decline in exports subtracted 3.44 points from growth, with more than all of that due to a decline in the export of goods, which subtracted 3.58 points, which was slightly offset by increased exports of services which added 0.14 growth points.

In the 3rd quarter, increasing exports added 0.40 growth points, and in the 2nd quarter exports were booming -- adding 1.54 points to growth. Declining imports were the biggest saving grace for the economy in the 4th quarter, adding 2.99 growth points following a 0.65 addition in the 3rd quarter. Overall, then, net exports were a 0.46 point drag in the 4th quarter, reversing contributions of 1.05 points in the 3rd quarter and 2.93 points in the 2nd quarter.

Government Spending helped cushion the decline in the economy a little bit in the 4th quarter, adding 0.32 points to growth, but this was way down from the 1.14 point contribution in the 3rd quarter. Within that, Federal spending added 0.50 points to growth, split 0.16 point contribution from defense spending and a 0.34 point contribution from non-defense spending.

In the 3rd quarter defense added 0.85 points and non-defense added 0.12 points. State and Local spending subtracted 0.18 points in the 4th quarter, reversing a 0.17 point contribution in the 3rd quarter.

Look for Federal spending to be a much bigger contribution in 2009, while State and local spending will most likely continue to be a drag.

Comments

[Dave Wrixon:]

Don't worry, there is a massive expansion of Government waste in the pipe-line, so that should have a big impact on the figures.

Frankly, I am not sure why anyone looks at the Commerce Dept figures. The employment numbers are probably even more unreliable. Even Goebbels wouldn't have had the nerve!

Mar 02 08:05 AM

[2houndz:]

In addition to Darden and Brinker throw in CAKE and all those "aspirational" brands, but also throw in the unneccesary grocery outlets like Whole Foods. We stopped shopping there over a year ago and the reduction in our food cost is staggering. We still eat a lot of organic product and we live well, but we shop at Publix, Wal Mart and the local seafood market (we live on the coast, so good seafood is relatively cheap). If you told me two years ago that I could reduce expenses for food by 30% and not go hungry I probably would not have believed it.

Unfortunately you may be correct in saying that people are going hungry, but we have seen huge savings by applying common sense at our house. I'm sure many others are doing the same and it probably spells TROUBLE for companies like Whole Foods.

Mar 02 08:18 AM

[YBUL:]

For every Federal Stimulus Dollar to be spent there are probably two being cut at the state and local levels.

Mar 02 08:22 AM

[kelm:]

The next few quarters are going to be very interesting. Globally numbers seem to be in free-fall with the US actually doing a bit better than most. I think that trend is unlikely to continue.

Mar 02 09:09 AM

[axelrod608:]

The big anomaly in all this is that the recently passed federal "budget" ( I use that term loosely) and the deficit projections are based on GDP GROWTH over 1% this year and GROWTH over 3% in subsequent years. I gotta get some of the stuff these "leaders" are smoking.

Mar 02 09:17 AM

[Mad Hedge F...:]

The US is turning into Europe. Think high taxes, high unemployment, more government involvement in everything, and much lower growth. That is the message the markets are telling us by retreating to the 6,000 handle, levels not seen since 1996, and down 54% from the peak only 17 months ago. Equity prices are shrinking to multiples in line with a permanently lower long term growth rate of maybe 2%, a shadow of the 5% rate seen for much of this decade. Maybe this is what mature economies are supposed to look like. If you do buy American stocks, only buy the ones that are really foreign stocks with American sounding names. Microsoft (MSFT), Intel (INTC), Oracle, (ORCL), Cisco (CSCO) all get 60%-70% of their profits from overseas where high growth rates have migrated. I think I’ll move to Tahiti and live off of coconuts and freshly speared fish, wearing only a loin cloth.

Mar 02 11:49 AM

[Amitabha Mu...:]

The decrease of consumer spending is the real danger . It will obviously mean more unemloyment down the line.This additional unemployed persons would lower their consumption and so the fall of consumer spending will spread like a wild fire pulling down the American economy to a point where it would be unrecognizeable considering todays situation.

Mar 02 02:39 PM

[2houndz:]

Amitabha Mukhopadhyay is right that lack of consumer spending is the problem, but its also part of the reason we find ourselves here in the first place.
It just occurred to me that the spending and all the "infrastructure" - think shopping centers, high-end restaurants, spas and high-end services we couldn't think of a decade ago, along with mountains of designer shoes, designer suits, designer everything and all the stores, service staff etc to sell us this stuff now must be dealt with.

If I don't step on the bathroom scales for a year I gain weight. I can go on a starvation diet and lose it, but it comes right back. The only healthy way to lose it is to work on it slowly, over time. I'm afraid it's the same with consumerism. These shopping center vacancies are not going away overnight, and neither is the debt and the toxic assets.

We might as well settle in for some long-term changes instead of selling out our children's future with the hope that we will wake up tomorrow and this will all be behind us and we can go back to the relentless pursuit of luxury.

Mar 02 04:28 PM

[beenburnedt...:]

This is a nicely written article with lots of flair. The author's use of comedy is entertaining, "When you find yourself in a hole, stop digging (new foundations)", or "....if Architects were not busy in 2008, then it is a lead-pipe cinch that Construction workers will not be busy in 2009." Another humorous quote is "Look for Federal spending to be a much bigger contribution in 2009, while State and local spending will most likely continue to be a drag."

It is plainly obvious that State spending will be at looking at 'climate change' proportions of decline. And that federal spending looks more like 'global warming' to the extreme--a supernova of unseen magnitude.

God help us all.

Mar 03 12:07 AM

[Dr. Realist:]

70% Chance that US will default on Treasuries by Dec 2009
80% Chance that the US military will have a high degree of intervention in our domestic problems by June 2010. "If your going to take over my house you better not just send the sherrif -- you better send the army!"

For those relying on God and for all you God fearing people remember every single one of us was born an atheist! Ho Hum. No Money in Atheism so we had to be changed and another ho hum. Just more bubbles and froth -- sorry to bust it.

Mar 03 01:11 PM

[Doug Roberts:]

Another great analytical piece by Dirk van Dijk!

Mar 04 10:05 PM