The first estimate of US economic growth in the fourth quarter of 2014 turned out to be a disappointment, but the second estimate … was even more disappointing. The Obama administration spent a lot of time bragging about the third quarter’s 5.0% annualized rate of GDP growth, but the economy reverted to its post-Great Recession norm in a hurry. The second estimate dropped GDP growth from 2.6% to 2.2%, back firmly in stagnation range:
Real gross domestic product — the value of the production of goods and services in the United States, adjusted for price changes — increased at an annual rate of 2.2 percent in the fourth quarter of 2014, according to the “second” estimate released by the Bureau of Economic Analysis. In the third quarter, real GDP increased 5.0 percent.
The GDP estimate released today is based on more complete source data than were available for the “advance” estimate issued last month. In the advance estimate, the increase in real GDP was 2.6 percent. With the second estimate for the fourth quarter, private inventory investment increased less than previously estimated, while nonresidential fixed investment increased more (see “Revisions” on page 3).
The one area where this estimate actually improved was on real final sales of domestic product, the measure of sales to end users without inventory adjustments. In the first estimate, real final sales only rose 1.8%, but the new estimate puts it at 2.1% — almost at the same level as overall growth. There are other high points in the report as well. Personal consumer expenditures continue to outperform the rest of the economy, with an increase of 4.2%, slightly down from the first estimate of 4.3%. Durable goods purchases rose 6.0%, but that’s a significant drop from the 7.4% in the first estimate. Exports increased more than first estimated, but so did imports, which tend to balance each other off.
As noted a month ago, this seems to be the real story of the boom-and-blah cycle between Q3 and Q4:
Real federal government consumption expenditures and gross investment decreased 7.5 percent in the fourth quarter, in contrast to an increase of 9.9 percent in the third. National defense decreased 12.4 percent, in contrast to an increase of 16.0 percent. Nondefense increased 1.4 percent, compared with an increase of 0.4 percent.
The end of the fiscal year prompted a lot of government spending in Q3. In baseline budgeting, bureaucracies either spend the money they have been allocated or watch their budgets shrink the next year. Zero-based budgeting would solve that problem, but few in the government wants to try that approach. The impact of the boom-and-blah appears to have inflated growth in Q3 while hiding some growth in Q4, especially in consumer spending, which continues to look very strong.
USA Today’s Paul Davidson notes the return to the Obama Recovery new normal:
Overall, however, the economy is accelerating after expanding just above 2% annually throughout the 5 ½ year-old recovery. Growth averaged 4.8% in the second and third quarters of last year, the best six-month stretch since 2003, and many economists expect output to rise by 3% this year. …
Consumers, however, splurged as falling gasoline prices left them more discretionary cash. Consumer spending rose 4.2%, just slightly below the initial 4.3% estimate and its strongest showing in four years..
And while exports grew 3.2%, more rapidly than initially thought, imports jumped far more dramatically at 10.1%, leaving a slightly wider trade deficit than first estimated and shaving a bit more off growth. The strong dollar bolstered imports by making them cheaper for U.S. consumers.
Reuters says to watch out for the weather:
Growth is poised to pick up in the first quarter now that the threat of an inventory overhang has diminished. However, an exceptionally cold and snowy February, as well as reductions in oil and gas drilling, could limit the pace of expansion.
“The composition of growth is looking much better, we are setting up for a solid quarter for the economy. The first quarter is still work in progress,” said Ryan Sweet, a senior economist at Moody’s Analytics in West Chester, Pennsylvania.
Businesses accumulated $88.4 billion worth of inventory in the fourth quarter, far less than the $113.1 billion the government had estimated last month.
That resulted in the GDP growth contribution from inventories being cut to one-tenth of a percentage point from 0.8 percentage point previously.
Yes, but at the same time the overall growth pace slowed between the two estimates as well. The reduced inventory overhang is a positive development, but a $25 billion difference in inventory is not going to be the key for a big quarter of growth in the following term. The American economy is a $4 trillion per quarter animal, making the difference nearly insignificant. The key will be whether consumers feel positive enough to maintain PCEs at a 4%+ rate.