Initial Fourth Quarter GDP Report Sends Mixed Signals
The initial report for Gross Domestic Product Growth for the Fourth Quarter of 2013 was released today and, to put it mildly, the results are mixed and the signals are cloudy. On the good side, the report shows the economy growing at an annualized 3.2% rate in the final quarter in the year, and while that is below the number we saw for the Third Quarter, it’s still a fairly decent number that may hopefully indicate that we’ll see better numbers heading into 2014. On the other hand, some of the details of that report show potentially worrisome signs for the future, and annual GDP growth for all of 2013 stands at 1.9%, which is below the 2.8% we saw for 2008. Given that every year of the economic recovery to date has shown an odd pattern whereby the numbers for the first and second quarters have typically been far weaker than the rest of the year, that doesn’t necessarily bode well for the economy as we head into what should be the fifth year of economic recovery since what has come to be called the Great Recession.
Here’s an excerpt from the Commerce Department report:
Real gross domestic product — the output of goods and services produced by labor and property located in the United States — increased at an annual rate of 3.2 percent in the fourth quarter of 2013 (that is, from the third quarter to the fourth quarter), according to the “advance” estimate released by the Bureau of Economic Analysis. In the third quarter, real GDP increased 4.1 percent.
The Bureau emphasized that the fourth-quarter advance estimate released today is based on source data that are incomplete or subject to further revision by the source agency (see the box on page 4 and “Comparisons of Revisions to GDP” on page 5). The “second” estimate for the fourth quarter, based on more complete data, will be released on February 28, 2014.
The increase in real GDP in the fourth quarter primarily reflected positive contributions from personal consumption expenditures (PCE), exports, nonresidential fixed investment, private inventory investment, and state and local government spending that were partly offset by negative contributions from federal government spending and residential fixed investment. Imports, which are a subtraction in the calculation of GDP, increased.
The deceleration in real GDP in the fourth quarter reflected a deceleration in private inventory investment, a larger decrease in federal government spending, a downturn in residential fixed investment, and decelerations in state and local government spending and in nonresidential fixed investment that were partly offset by accelerations in exports and in PCE and a deceleration in imports.
Real GDP increased 1.9 percent in 2013 (that is, from the 2012 annual level to the 2013 annual level), compared with an increase of 2.8 percent in 2012.
Real gross domestic purchases — purchases by U.S. residents of goods and services wherever produced — increased 1.8 percent in the fourth quarter, compared with an increase of 3.9 percent in the third.
The New York Times puts something of a positive spin on the numbers:
While the headline number was encouraging, the details of Thursday’s report neatly illustrate the crosscurrents that have been buffeting the economy, and have prevented it from achieving more sustained gains.
For example, although consumer spending grew by 3.3 percent in October, November and December, up from a 2 percent increase in the third quarter, government expenditures plunged 12.6 percent because of the shutdown and automatic budget cuts imposed by Congress at the start of 2013.
Over all, the government pullback lowered fourth-quarter growth by 0.9 percentage points, with the shutdown itself shaving off 0.3 percentage points. In addition, the residential housing sector was also a source of weakness, cutting overall growth by 0.3 percentage points.
Some of that drop was weather-related, as construction activity halted, but it also represents a slowing of housing gains as mortgage interest rates rose and the sector’s postrecessi,n rebound cooled. The fourth quarter of 2013 was the first time that housing was a drag on overall growth since 2010.
As was the case in the third quarter, inventory additions by businesses lifted growth, adding 0.4 percentage points. Those stockpiles will most likely be drawn down in the first quarter of 2014, slowing the expansion a bit in the current quarter, economists said.
The trade picture continued to improve, as exports rose strongly while imports inched up only a bit.
“It’s a pretty solid report with a big burst in consumption at the end of the year, a big narrowing in the trade deficit and some weakness in housing,” said Julia Coronado, chief economist for North America at BNP Paribas.
Reuters was much more circumspect in its take, especially when viewed in light of the news that new unemployment claims had risen last week:
The number of Americans filing new claims for unemployment benefits rose more than expected last week, but the underlying trend suggested the labor market continued to heal.
Initial claims for state unemployment benefits increased 19,000 to a seasonally adjusted 348,000, the Labor Department said on Thursday. Claims for the prior week were revised to show 3,000 more applications received than previously reported.
Gross domestic product grew at a 3.2 percent annual rate, the Commerce Department said, in line with expectations. While that was a slowdown from the third-quarter’s brisk 4.1 percent pace, it was a far stronger performance than earlieranticipated and was welcome news in light of a 0.3 percentage point drag from October’s partial government shutdown and a much smaller contribution to growth from a restocking by businesses.
Earlier in the quarter many economists were anticipating a growth pace below 2 percent given that an inventory surge accounted for much of the increase in the July-September period. Growth over the second half of the year come in at a 3.7percent pace, up sharply from 1.8 percent in the first six months of the year. It was the biggest half-year increase since the second half of 2003.
Digging down into the details of this initial report, there are some elements of concern as we head into 2014. First of all, there’s the news that gross domestic purchases increased by a mere 1.8% in the 4th Quarter as opposed to a Third Quarter increase of 3.9% and that personal consumption expenditures rose 2.4% year over year for the 4th Quarter, which seems indicative of either a weak holiday season or one in which inventory only moved after it was deeply discounted. Secondly, there are the same indications in these numbers that we’ve seen in previous years that we’ll see a repeat of the pattern I noted above where the first half of the year shows relatively weak and anemic growth, followed by a slight improvement in the second half in the year that leaves us with an anemic overall growth rate for the year as a whole. Indeed, for all of the four full years of the post Great Recession we haven’t had a year of annual GDP growth above 3% since before the Great Recession. This compares quite unfavorably to previous economic recoveries where economic growth at annualized rates between 4% and 5% were quite common, and is quite likely the primary reasons that the most lingering impact of the Great Recession, long-term unemployment, continues to haunt the economy.
All in all, this initial report is good news, but there are enough cautionary signals here to worry about what 2014 might actually bring us, especially given the fact that the Fed has begun to taper on its Quantitative Easing program and growing indications of weakness in emerging overseas markets, including China. So, keep those champagne bottles corked for now people.