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5 Quick Thoughts On Today’s US GDP Report
The economy in the U.S. expanded at a slower pace than forecast in the fourth quarter as cooling business investment, a slump in government outlays and a widening trade gap took some of the luster off the biggest gain in consumer spending in almost nine years. Gross domestic product grew at a 2.6 percent annualized rate after a 5 percent gain in the third quarter that was the fastest since 2003, Commerce Department figures showed Thursday in Washington. The median forecast of 85 economists surveyed by Bloomberg called for a 3 percent advance. Consumer spending, which accounts for almost 70 percent of the economy, climbed 4.3 percent, more than projected.
1.) Good news if you think the economy’s big problem is a lack of consumer demand. Help from gas prices now and going forward, too. Barclays: “The US consumer is receiving a windfall from lower energy prices while a stronger dollar and weak global growth is weighing on net exports.”
2.) If you are worried about a chronic lack of business investment, not so good. “The strong pace of consumer spending in the fourth quarter, however, was overshadowed by a drop in capital expenditure. Business spending on equipment fell at a 1.9 percent rate. It was the largest contraction since the second quarter of 2009,” Reuters explains. Maybe just a dip after two stronger quarters. We’ll see. But don’t blame falling oil prices shutting down the shale revolution. Capital Economics: “This weakness does not, however, reflect a pull back by oil producers. Mining structures investment increased by 9% annualised and mining equipment investment was broadly unchanged.”
Here is a good catch from JP Morgan: “Outlays for capital equipment actually contracted at a 1.9% pace last quarter, the worst quarter of the expansion, and the business investment figure would have been even worse were it not for the estimated 9.4% rate of increase in spending on software.”
3.) The 2.4% annualized rise in the fourth-quarter employment cost index suggests plenty of slack in the labor market. Where is the wage growth? Well, at least it didn’t show wages declining like the last jobs report did.
4.) How badly is GDP missing the digital economy? A great point here from a new analysis by Michael Mandel: “The rise of the data-driven economy means government economic statistics may significantly understate US GDP growth and productivity growth. Official numbers are afflicted by huge and growing blind spots that increasingly distort the published figures. To summarize, we are building a mammoth data-driven economy that, perversely, is only partly visible in the economic data.”
5.) If the previous point is true, they maybe it is less likely the economy is suffering from secular stagnation. After all, many thought this would be a year of accelerating growth. And in some ways it was. The past three quarters combined were the strongest of the recovery. Yet year over year, growth was up 0.2% over last year. (It was actually down on 4q-to-4q basis.) Many on Wall Street are expecting a 3-3.5% GDP year this year. Another 2% year, I think, makes the stagnation case stronger.
Published in General
Much of consumer “spending” increase was mandated expensive medical care and insurance costs!
It’s been a really long time since my Econ 101 class in school. Can someone please explain why government spending is included in GDP? Doesn’t the money the government spends come to it because it stole (taxed) it from the productive members of the economy. This is money they may have spent quite differently and may have had a much stronger cumulative effect on the economy had it not been siphoned off and wasted via bureaucratic red tape. It seems like government spending should be deducted from the GDP.
Agree with RushBabe. The reported growth was a statistical sleight of hand that ( broken record time) would not have been reported and unchallenged by the Media if the White House were in GOP hands.
Thanks for this and all your posts. I don’t comment on them much, but I do appreciate them.
That 3rd quarter 5% GDP print was almost wholly based on health care spending that had been pocketed by those doing the metrics, and dropped into the Q3 data.
As James notes, the GDP metric itself isn’t necessarily suspect, but to use it as a barometer of overall economic health is tricky. You have to know the components pretty well, and understand how the numbers are generated, and what they mean.
Secondly, what James also notes is key: Employment and wage growth. Median household income is still significantly lower than its most recent peak in 2007. Average YOY wage growth is well below the inflation number.
The “recovery” numbers should probably include a concomitant increase in wages, wage growth, and employment, but none of that is happening in the aggregate. When health care spending becomes such a large crutch to pin GDP growth under, it’s a sign we’re doing all the wrong things. And they’re not working.
I’ll take an amateurish stab at this question, which is a good one.
Even though the money the government spent would have been spent in the private economy if not taken away from them, it was, nevertheless spent by government. Thus, deducting it from GDP would lead to it not being counted even once.
The government did produce something with the money, mostly services, such as courts, regulation of business, and defense. It also builds some infrastructure. It does not produce much in the way of goods. We could argue that much of this spending is wasteful or even counter-productive, but that is another issue. Assuming the spending is on services we desire, that adds to our standard of living, and hence is properly counted in GDP. For example, the services provided by the USPS add to GDP just as much as those provided by UPS.
As a thought experiment, consider a communist country where all economic activity is performed by the government. Not to count what government produces would mean a GDP of zero.
If this were true, wouldn’t Gross Domestic Income trend away from GDP? The data drivers age getting paid, and the internet businesses are being taxed, so while the output might be getting harder to track, total wages, profits, interest payments, and rents shouldn’t be any more hidden. I seem to recall that some economists at the Atlanta Fed were studying the statistical discrepancy between GDP and GDI to see if there were any information hidden in what should be a random error term, and were not finding much.
Wow, the economy is slowing down? Interesting how they were able to push that news till after the election. Also interesting how long it takes the government to “officially” tell me what every small business person has known for about 5 months. That the economy slowed down toward the end of the year and has yet to bounce back. Things are starting to pick up again but for about 3-4 months it was really slow. How do I and other business people know this magical information way before the government? Well we look at our accounting. Our A/P and A/R. If people stop paying me on time, if I stop getting orders as usual, if I stop paying people as quickly as normal. Well the economy has slowed down. If gas prices drop rapidly, well the US economy and most likely the worlds economies have slowed down. It is really about that simple.
You’re not counting two things:
1. Those tax dollars taken by the government and then subsequently spent are filtered through the bureaucracy of gov’t. There is nothing productive being done – meaning a service or good provided – when tax dollars pay IRS employees to make sure the taxes taken out of your paycheck are accurate.
2. The gov’t spends more than it takes in, through borrowing. So some portion of every gov’t spend – defense, social security, park ranger salaries – is tax income yet to be realized, and interest is paid on it.
So – the general GDP assumption is that the tax dollars taken from an individual or corporation aren’t spent by the individual and the corporation, but by the gov’t, so it contributes to GDP. It also contributes by its spend over and above what it takes in, because those dollars are spent in that year, but there’s a bit of a catch with that spend, in that roughly 40% of it is borrowed and will have to be paid back later, with interest, which diminishes the impact of the current spend. It’s assumed that the markets and all other pricing take into account the fact that there’s a massive debt overhang that must one day be reckoned with, at least in part.