Economic Growth Picks Up, So Why All the Gloom?
Fourth quarter gross domestic productwas the best in a year and a half, but the economy’s gains look to be short-lived and the first quarter could be slightly more sluggish than expected.
The fourth quarter’s 2.8 percent growth rate was short of the 3 percent expected by economists but better than the third quarter’s 1.8 percent pace.
The report, however, showed surprising weakness in several key areas and comes in the same week that the Federal Reserveshaved its own growth forecasts and signaled it will keep rates low for nearly three years.
“We still had the best growth in a year and a half, but it’s really the devil in the details," said Jonathan Basile, Credit Suisse economist. "Final sales slowed more than we thought. The inventory was pretty much in line but within the detail…the private sector didn’t do that well. You had consumer spending slower than expected, business spending slower.”
Pierpoint Securities chief economist Stephen Stanley notes the bulk of the increase — nearly 2 points — came from inventories. A big increase in inventories is not a good sign because it means companies aren't selling as much and need to cut back on production.
He had expected to see inventories at $25 billion but they were more than double that, still in line with some other forecasts. He notes the inventory build came as final demand was short of his expectations in most categories.
“After a marginal outright decline in stocks in Q3 (a rare occurrence), inventories were rebuilt to the tune of $56 billion annualized in Q4. ...the higher level of inventories at the end of the year implies less GDP growth going forward,” he said in a note. As a result, he cut his forecast for first quarter GDP to 2.2 percent growth from 2.9 percent.
Basile said he expected first quarter growth of 2.2 percent. “It’s not a restock with accelerating demand picture, it’s a restock with a decelerating demand picture. We’re going to slow down. We already had that built into our forecast anyway but maybe it’s even slower than that,” he said.
There was also a big slowdown in government spending, with a 12.5 percent drop in defense spending. The defense number is volatile, and economists do not expect to see it continue that pace of decline.
Business spending grew just 1.7 percent in the fourth quarter, sharply lower than the third quarter’s 15.7 percent. But home construction spending picked up, mostly for rental units, with its best pace since second quarter, 2010.
Goldman Sachs economists pointed out that the auto sector added 0.3 percent to growth. Net exports, however, subtracted 0.1 percent, while Goldman economists had expected a positive contribution of 0.5 percent.
Citigroup economists, in their analysis of the report, note that first quarter growth is now looking to be just under 2 percent.
Consumer spending rose 2 percent, while some economists expected as much as a half percent more. The Citigroup economists note that it was held down by housing and utilities services, which fell 3.1 percent in the fourth quarter, the largest drop since the first quarter of 1990.
The lower utilities spending can be explained away by unseasonably warm weather which also hit apparel sales this winter.
“If people are saving on their heating bills, maybe they’re just not spending it yet,” Basile said.
Barclays economists point out a positive in that real disposable income rose 0.8 percent, noting a solid rebound compared to declines of 1.9 percent in the third quarter and 0.5 percent decline in the second quarter.
“All in all, looking past some of the volatile movements that are unlikely to persist — such as the sharp rise inventories and sharp drop in defense spending — today’s report provides a picture of modest, if unspectacular, growth in domestic demand,“ the Barclays economists noted. “Our view remains that the recovery will continue gradually to build momentum, but this is unlikely to shift the dovish stance of monetary policy.”
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