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Daily Global Commentary

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Q4 GDP Report – Decline was Expected, Gain in Inventories Masks True Weakness

Sun, Feb 1 2009, 21:57 GMT
by Northern Trust Economic Research Department

Northern Trust

Q4 GDP Report – Decline was Expected, Gain in Inventories Masks True Weakness

Real gross domestic product (GDP) declined 3.8% in the fourth quarter of 2008, the minus sign for GDP growth was not a surprise but a larger decline was widely expected. The increase in inventories (+$6.2 billion vs. -$29.6 billion in Q3), which was largely unexpected, offset the weakness in demand and trimmed down the headline reading.

Final sales of gross domestic product (real GDP less inventories) dropped at an annual rate of 5.1% in the fourth quarter after a 1.3% decline in the prior quarter. This is the largest weakness in final sales since the second quarter of 1980. The 3.8% decline of real GDP is the largest since the first quarter of 1982. Excluding motor vehicles, real GDP fell 1.8% in the third quarter.

Nominal GDP declined 4.1% in the fourth quarter (see chart 3), the sharpest drop since the first quarter of 1958 (-6.3%, 1960:Q4: -3.95%).

The 3.5% annualized decline of consumer expenditures in the fourth quarter following a 3.8% plunge in the third quarter is a significant back-to-back weakness in consumer spending. An additional three quarters of declines in consumer spending is part of our forecast.

On a year-to-year basis, consumer spending is down 1.34% in the fourth quarter (see chart 5), the weakest reading since the fourth quarter of 1974 (-1.46%, 1980:Q3: -1.0%). Charts 4-5 underscore the extent of weakness in consumer spending.

Among the other components of GDP, equipment and software spending fell 27.8% in the fourth quarter, putting the year-to-year decline at 10.9%, matching the largest decline seen in the 2001 recession (see chart 6).

Residential investment expenditures posted the twelfth consecutive quarter decline in the fourth quarter (-23.6%). The good news here is that although the drop in the fourth quarter exceeds the 16% decline recorded in the third quarter, the year-to-year trend of residential investment expenditures suggests that the fourth quarter may be the bottom (see chart 7, Q4: -19.7% vs. -21.7% in Q2 and -20.6% in the Q3), additional readings will be necessary to confirm.

Outlays on structures fell 1.8%, the first drop since the second quarter of 2005. The trade deficit widened slightly to $356.4 billion from a $353.1 billion trade gap in the third quarter. Exports of goods and services fell 19.7%, the first drop in five years and imports of goods and services dropped 15.7%. Government outlays advanced 1.9% in the fourth quarter, the only other component besides inventories that made a positive contribution to the headline.

The overall GDP price gauge fell 0.1%, while the core GDP price index (which excludes food and energy) moved up 0.7%. The personal consumption expenditures price index fell 5.5% in the fourth quarter and core personal consumption price index rose 0.6%.

In sum, real GDP rose 1.3% in 2008 and the GDP price index moved up 2.1% after gains of 2.0% and 2.7%, respectively in 2007.

In other related news, the Employment Cost Index (ECI) increased 0.5% in the fourth quarter, reflecting a 0.5% gain in wages and salaries and a 0.4% increase in benefit costs. The year-to-year increase is 2.6% in the fourth quarter, the smallest gain on record (see chart 10).

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Published on  Sun, Feb 1 2009, 22:03 GMT