Barry Ritholtz Reacts to the GDP Number
Covering the Economy: January 27 GDP Release: Greg Ip Saturday Morning WSJ Story

Covering the Economy: January 27 GDP Advance Release: LA Times Story

The LA Times Saturday morning story:

GDP Data Are Weak and, Many Say, Off Base - Los Angeles Times : By Bill Sing, Times Staff Writer: The U.S. economy grew at a surprisingly weak 1.1% annual rate in the last three months of 2005, the Commerce Department said Friday, but many analysts said the economy was more robust than reported and would rebound in the current quarter. The fourth-quarter growth swoon was blamed largely on sluggish auto sales, surprisingly slow growth in business spending, a surge in imports and a drop in spending by the federal government. Hurricane damage and high energy costs took their toll on consumers and businesses, analysts said.

Growth in the gross domestic product, the broadest measure of U.S. economic output, fell far below the 2.8% predicted by economists and the 4.1% pace of the third quarter. It was the slowest growth rate since the 0.2% posted in the fourth quarter of 2002, when the economy was struggling to recover from the 2001 recession. A closely watched measure of inflation also rose, nearing a level seen as worrisome to Federal Reserve policymakers. The report came at a time when polls show that many Americans are skeptical about the economy's strength. A nationwide Los Angeles Times/Bloomberg poll, released Thursday, said 59% of respondents disapproved of the way President Bush was handling the economy. The Bush administration and many experts, however, expressed doubt at the accuracy of the latest growth report, suggesting that it was at odds with other economic data. They predicted that the numbers would be revised upward.

"The fourth quarter was soft, but it wasn't this soft," said Mark Zandi, chief economist for Moody's in West Chester, Pa. With recent reports suggesting strengthening job creation and business spending, "the economy is not growing at 1%. It feels more like 4%," Zandi said. Stock investors, who make their bets on future growth, also shrugged off the report, pushing the Dow Jones industrial average up nearly 100 points. Investors were encouraged by stronger growth in Europe and Japan, which could offset any slowdown in the U.S. Several factors contributed to the fourth-quarter slump.

Consumer spending, which accounts for more than two-thirds of the economy, rose only 1.1%. That was far slower than the 4.1% gain in the third quarter and the slowest since the second quarter of 2001, when the economy was mired in recession. Purchases of big-ticket "durable" goods, such as cars, plunged 17.5%, the biggest fall in nearly 20 years. Business investment grew at 2.8%, down from a 8.5% gain in the third quarter. Federal government spending fell 7%, hit by a 13.1% drop in defense outlays. Exports grew 2.4%, and imports jumped 9.1%.

But analysts said the numbers failed to tell the entire story. Auto sales plunged because carmakers' "employee discount" offers during the summer pulled sales from the fourth quarter into the third. Excluding big-ticket goods such as autos, consumer spending actually grew faster in the fourth quarter than in the previous period. Businesses also appeared to have pushed spending on vehicles into the summer, economist Zandi said. And the fall in defense spending didn't seem logical given the continuing Iraq war. Some outlays may have been pushed back or forward, he said. Government spending on hurricane recovery efforts "didn't show up at all" in the report, Zandi said, suggesting that data collectors had incomplete figures on government relief checks for victims of hurricanes Katrina and Rita. "When lots of [unusual] things are going on, it's easier to get it wrong." The government's next estimate of fourth-quarter growth is due Feb. 28, presumably when better data will be available.

On Friday, Bush administration officials highlighted positives in the latest report, including news that the economy grew 3.5% for all of last year. That surpassed the 3.3% average of the last 50 years, although it fell short of the 4.2% pace in 2004. "I would not read too much into today's numbers," Treasury Secretary John W. Snow said in a statement. "They are somewhat anomalous, reflecting some special factors. They are not consistent with other data on the U.S. economy which paint a picture of good growth." Analysts are predicting that growth in the current January-to-March quarter may equal or exceed 3.5%. Many companies, flush with cash from strong profits, have announced plans to increase spending on computers, machinery and other tools.

Recent reports on unemployment claims also suggest strengthening job growth, which could in turn boost wages. The next U.S. job report, for January, will be released Friday. Inflation, however, remains problematic. An inflation measure closely watched by Fed Chairman Alan Greenspan, for so-called core personal consumption expenditures, rose at an annual rate of 2.2% in the fourth quarter. That was up from 1.4% in the third quarter and close to the 2.5% level seen as the upper limit of the Fed's "comfort zone," said Nariman Behravesh, chief economist at Global Insight, a research firm in Waltham, Mass. "I'd be a little antsy if I were the Fed," Behravesh said. In its continuing effort to keep a lasso on inflation, the central bank is expected Tuesday to raise its benchmark short-term interest rate by another quarter percentage point, to 4.5%. That will mark the last official Fed policymaking meeting for outgoing Chairman Greenspan. Incoming Chairman Ben S. Bernanke is expected to raise rates again at his first policy meeting March 28. But the central bank might pause after that, some analysts say.