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Barry Ritholtz: Taking Apart Robust GDP Data

Barry Ritholtz worries about the good 4Q GDP growth, seeking to put a dark cloud around the silver lining:

The Big Picture | Taking Apart Robust GDP Data: Now, you may not be surprised to see this sort of chatter from me or the even more bearish Nouriel Roubini. However, you should be... shocked to see it from the generally bullish Tony Crescenzi....

I don't mean to discredit the fourth-quarter gain completely, and I have been upbeat about growth, but the reported gain must be watered down to some degree. Let's take a look at each of the four factors listed above and how we can interpret the data.

Crescenzi notes that business spending fell during the quarter -- equipment and software dropped 1.8%, the 2nd decline in three quarters and the largest since Q4 2002. That's consistent with the contraction in the Chicago PMI, suggesting the U.S. manufacturing sector is still decellerating.

The residential spending figure was called "sobering" -- "it subtracted 1.2 points from GDP, and fell for a fifth consecutive quarter, by 19.2%. That follows decreases of 18.7% in the third quarter and 11.1% in the second quarter. The fourth-quarter decline was the highest since 1991..."

Also of note: The relatively large contribution from the government sector. Spending increased 3.7%, with Uncle Sam spending 4.5% more, largely due to an 11.9% spike in defense spending. State and local spending increased 3.3%. Government added 0.7% of the Q4 GDP gains.

Where Tony really surprised me, however, was his take on personal spending.

On the surface, the figure looks solid, increasing 4.4%. The problem, however, is that it reflects a gain of just 3.6% in nominal spending because the personal consumption deflator fell 0.8%, its first decrease since 1961 and the largest decline since 1954, according to Market News.

This means that if the inflation rate for the quarter were at a normal level, say, up 2.0%, personal spending would have seen a very small gain of just 1.6% for the quarter. (I get this by subtracting 2.0% from 3.6%.)

The low level of nominal spending, which was the weakest in four years, reflects strain on the consumer. This figure represents the total amount of money that consumers spent during the quarter, a tally that looked good only because they caught a break with the decline in energy costs. Had energy costs increased, it would have produced a much different result. For context, nominal spending in the overall economy has increased at a pace of 5.6%; it increased at a pace of 5.0% in the fourth quarter.

The bottom line: A good number, but with some hair on it, likely benefiting from warmer weather, government spending, decreased energy prices -- but also likely subject to further revisions.

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