The U.S. economy limped into 2006, growing at a less-than-expected 1.1 percent rate in the fourth quarter as consumers spent at the slowest pace since 2001 and corporations limited equipment purchases.
The rise in gross domestic product, the value of all goods and services produced in the U.S., followed a 4.1 percent annual rate of increase in the previous three months, the Commerce Department reported today in Washington. A measure of inflation rose more than expected.
The slowdown from October through December snapped 10 straight quarters of growth exceeding 3 percent. That was the longest such string since the 13 quarters that ended in March 1986.
The entire release is here.
Treasury Secretary Snow (idiot, dolt and moron) was in full spin mode:
The advanced estimate of fourth quarter 2005 GDP released this morning is inconsistent with the underlying strength of the U.S. economy.
I would not read too much into today's numbers. They are somewhat anomalous, reflecting some special factors. They are not consistent with other data on the U.S. economy which paint a picture of good growth:
(Snow is the first person diagnosed with a new medical ailment named Rovearoids which occur from having Rove's hand shoved up your ass for an extended period of time.)
To be fair, these are preliminary numbers. They could be revised over the next few months.
There are several reasons for this slowdown. Consumer expenditures which account for about 70% of GDP growth barely rose from 7.907.9 trillion to 7930.2 trillion, or a 1.1% increase. These expenditures increased an average of 3.9% in the previous five quarters. The biggest drop within consumer spending occurred in motor vehicles, which dropped 13% from 477 billion to 411 billion. Overall, durable good sales dropped 17.5%. The major American car manufacturers ended their employee discount promotion at the end of the third quarter so this drop is not unexpected. However, there is a question whether car purchases will rise to previous levels. The price concessions existed for a year or more, possibly conditioning consumers to expect massive price concessions from the dealers on a regular basis. A similar situation has occurred with holiday shopping, as consumers more and more wait until the last minute as retailers continue to offer better and better bargains closer to the holidays. A second big drop came in government spending, which decreased 2.4%.
The drop in GDP coincides with two straight months of declines in consumer credit. In addition, non-revolving credit (mortgages etc) dropped for the last three months. This is obviously correlation, but I don't know if it is causation - meaning the drop in consumer credit caused the drop in consumer spending. However, this is a credit-oriented economy making this coincidence very interesting.
Exports increased 2.4% while imports increased 5.1%. In other words, despite 10 quarters of solid GDP growth US exporters are nowhere near overtaking the mammoth amount of US imports. As a result the trade gap will show no sign of improvement in the near future.
Once again, the US savings rate was negative, this time coming in at -33 billion. For all 2005 personal savings were -41 billion, indicating for the better part of the year, US consumers spent more than they made.
Of particular concern was the increase in the GDP price deflator, which is fairly similar to an inflation measure. The GDP price deflator increased 3% from the previous quarter. This places the Federal Reserve in a policy quandary. Inflation pressures still exist, creating the impetus to raise rates. However, the overall growth rate of the economy is very low. Another increase in interest rates could be enough to both slow inflation and the economy while the economy is possibly teetering on the brink of recession.
There has been a fair amount of discussion in the financial press about a pick-up in business spending taking up the slack for a decrease in consumer spending. Business spending comprised 17.4% of total US GDP in the third quarter of 2005, implying that business would have to radically increase its investment to make-up for any drop in consumer spending.
So, is this the beginning of a big slowdown? One quarter does not a trend make. In addition, I am a fervent believer in not forecasting economic events. There are simply way too many variables to consider. However, the size of the drop caught many observers by surprise. And polls have continually suggested that Americans are dissatisfied with the economy as a whole. This might be their feelings translating into action.
Also at My Left Wing