Why Slower Fourth Quarter Growth?

Popular Economics Weekly

Gross domestic product — the value of everything a nation produces — expanded at a 0.7 percent annual rate from October to December. That’s a big markdown from 2 percent growth in the fall and 3.9 percent last spring. The economy expanded at a 2.4 percent clip last year, the same as in 2014, the Commerce Department said. Alas, the U.S. hasn’t topped 3 percent growth since 2005.

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Graph: Marketwatch

But those numbers may be revised higher, as more data on imports/exports and inventories for December come in. Hence there are two more revisions to the Q4 GDP estimate put out by Commerce. Softer consumer spending, falling exports and a smaller buildup in business inventories were largely the cause of the fourth-quarter slowdown, fresh government data showed.

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Graph: Marketwatch

However, the biggest drag on growth was in industrial production. Though the drop in industrial production in the fourth quarter was concentrated not in manufacturing, per se, but in mining and utilities, mostly due to falling energy prices, says Marketwatch’s Rex Nutting. “Manufacturing output slowed in the fourth quarter, but it did grow, at an anemic annual rate of 0.5 percent. Meanwhile, mining output (mostly petroleum and other fossil fuels) plunged at a 15.5 percent rate and utilities (hurt by the warmer-than-usual fall) saw seasonally adjusted output drop at a 15.4 percent annual rate.”

On the other hand, spending on services was higher, adding 0.9 percentage points, as was spending on goods, at plus 0.5. Residential investment, another measure of consumer health, rose very solidly once again, contributing 0.3 percentage points. Government purchases added modestly to growth.

Inflation fell again, but personal consumption is holding up, as is consumer sentiment. And next week’s December unemployment report will tell us if January growth might pick up, since strong employment tends to boost consumer spending.

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Graph: Econoday

Consumer spending may not be that strong but consumer confidence is solid, at 98.1 in January, says the Conference Board. “Consumer confidence improved slightly in January, following an increase in December,” said Lynn Franco, Director of Economic Indicators at The Conference Board. “Consumers’ assessment of current conditions held steady, while their expectations for the next six months improved moderately. For now, consumers do not foresee the volatility in financial markets as having a negative impact on the economy.”

The assessment of the current jobs market is favorable with only 23.4 percent describing jobs as hard to get. This is a low percentage for this reading and down more than 1 percentage point from December. But improvement here is offset by a dip in those describing jobs as currently plentiful, down 1.4 percentage points to 22.8 percent.

The bottom line is economic growth has slowed due to a decline in energy and commodity prices that hurts some industrial sectors, but it helps consumers. And consumers account for some 70 percent of economic activity these days. So look for increased government spending (state and national) on public works, as well as more new home construction to keep us out of a recession in 2016. This activity is all domestic, which isn’t affected by what is happening in China, Europe, the Middle East, Russia, and other third world countries.

Harlan Green © 2016

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

About populareconomicsblog

Harlan Green is editor/publisher of PopularEconomics.com, and content provider of 3 weekly columns to various blogs--Popular Economics Weekly, The Huffington Post, and PeaceCorpsWorldwide.org.
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