Faster GDP Growth Will Be Welcome News for the White House, Despite “Ifs” and “Buts” in the Details
According to the advance estimate released today by the Bureau of Economic Analysis, U.S. real GDP growth increased to a 2.8 percent annual rate in the fourth quarter of 2011, compared to just 1.8 percent the previous quarter. It was the tenth consecutive quarter of growth since the end of the recession.
Furthermore, the new data show that the economy has now solidly entered the expansion phase of the business cycle. Expansion begins when real GDP surpasses its prerecession peak, which occurred in Q4 2007. Technically, the expansion had already begun in Q3, but by such a tiny margin (just 0.04 percent) that it was hardly enough to count.
Although the GDP numbers appear to be good news for the White House as the election season heats up, there are a number of “ifs” and “buts” buried in the details.
First, it is important to keep in mind that the advance estimate is based on incomplete data, most of it from early in the quarter, with the gaps filled in by extrapolation from past trends. The advance estimate is often substantially revised. For example, the advance estimate of 2.5 percent for Q3 growth was revised down to 2.0% a month later and finally, in December, to just 1.8 percent. Today’s numbers might justify asking the White House wine steward to put some champagne on ice, but it would be premature to pop the cork.
Second, we need to look at which bits of the economy are growing and which are not. Consumption contributed 1.45 percentage points of the 2.8 percent growth, even stronger than in Q3. The biggest contributor to growth, however, was investment, which contributed 2.35 percentage points to Q4 growth compared with just 0.17 in Q3. The problem is, 1.94 percentage points of that came from growth of private inventories. Fixed investment contributed sharply less than in Q3, despite a moderate improvement in housing.
The investment numbers, then, pose a big “if.” If the inventory increase means that optimistic businesses are stocking up to meet expected higher demand in 2012, then it is a good number. If it is only a correction from the unusually large inventory decrease (-1.35 percentage points) in Q3, then it may not be sustained. Worst of all, if the Q4 inventory increase reflects unplanned accumulation that occurred because sales lagged expectations, then it is a bad number that could be a harbinger of slower growth in the winter. More reasons not to pop the cork.
Looking further down the GDP tables, net exports, which contributed a positive 0.43 percentage points to growth in Q3, turned negative in Q4. Exports added 0.64 percentage points to growth in Q4, the same as in Q3, but growth of imports (a negative number in the GDP accounts) was even faster. If the world economy slows in 2012, as the latest World Bank forecasts indicate, it may not be possible to count on net exports as a positive growth factor in 2012.
Furthermore, the government sector was an even bigger drag on GDP in Q4 than in earlier quarters. State and local government spending fell again, as it has been doing for most of the recession. In Q4, however, federal defense spending also fell, rather than helping to offset the weakness of other government sectors, as it had earlier. On balance, the contribution of government to GDP growth was minus 0.93 percentage points in Q4. With defense spending likely to continue to shrink, the drag from the government sector is very unlikely to disappear any time soon.
Finally, it is worth noting that even though growth of real GDP picked up in Q4, growth of nominal GDP (NGDP) slowed. In Q3, NGDP grew at an annual rate of 4.4 percent, roughly the rate that many observers think is needed to hold the output gap steady if inflation runs at the 2 percent rate that has now become the Fed’s official target. In Q4, NGDP growth slowed to 3.2 percent. NGDP targeters will greet that number with renewed calls for fiscal and monetary stimulus, but it seems unlikely that much of either will be forthcoming in the polarized climate of this election year.
The bottom line: Yes, it is encouraging that growth seems to be picking up. Each quarter of growth, like each downtick in unemployment, will make it easier for the Obama administration to defend its record of economic management. But there are many data releases to come between now and November.
Follow this link to view or download a slideshow version of the latest GDP data.
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