First Quarter Growth Revised from -1% to -2.9%?

The government released its final estimate of first quarter growth and it showed a decline of nearly 3% compared to an initial estimate of +0.1% and second estimate of -1%.  Why the decline?  Consumption grew less than previously estimated, +1% instead of +3.1%.  What happened?  In a previous post, I noted how spending on health care services rose by nearly 10% in the first quarter, adding a record 1.1% to economic growth (most since records started being kept in 1959).  According to the latest estimate, spending on health care services actually declined by 1.4%.  Instead of being historic in terms of the size of the increase, it is now historic in terms of the size of the decrease (the largest decline in health care spending since the first quarter of 1982).  So instead of adding 1.1% to growth, it subtracted about 0.2% from growth.  Given the size of the US economy, some revisions are to be expected (as more data becomes available, estimates can be made more accurate).  However, that doesn't normally result in such a large revision.  The near-record growth in health care spending initially reported was attributed to the introduction of Obamacare.  Details and explanation are not readily available, but it seems that something went seriously wrong in the early estimates of the impact of Obamacare on spending on health care.

Revisions to First Quarter GDP

The headline number for this morning's GDP report was that the economy shrank by 1% (compared to an initial estimate of growth of 0.1%).  What was responsible for the revision?  Almost the entire revision was due to a decline in inventory investment, which subtracted 1.6% from economic growth compared to an initial estimate of 0.6%.  So final sales (growth excluding inventories) declined from 0.7% to 0.6%.  This is actually good news for future growth since companies have less inventory on hand, increases in demand are more likely to result in increases in production.  Most of the other details of the report are similar to initial estimates (see previous post) - positives include a record contribution from healthcare due to Obamacare and a sizeable contribution from utilities due to the harsh winter while minuses include weak construction (likely due to the harsh winter) and weakness in business investment and exports (some payback from unsustainably strong exports in late 2013).

First Quarter GDP

The economy barely grew in the first quarter of 2014 (+0.1%).  Though this was below the consensus estimate, many of the reasons for the slowdown were not a surprise.  The inventory buildup in 2013 was pared down somewhat resulting in inventories subtracting almost 0.6% from economic growth.  Exports rose at an unsustainable rate in late 2013, given the state of the global economy.  Some of this gain was given back as exports fell in early 2014.  As a result, net exports subtracted 0.8% from economic growth.  Of course everyone is aware of the severe winter and how that hurt economic growth (though that is difficult to quantify).  Let's look at some of the details.

At first glance, what stood out to me was the growth in consumption led by a significant increase in spending on consumer services - the largest since 2000.  One of the main reasons was a surge in spending on health care (+9.9%), the largest quarterly increase since 1980.  Health care spending rarely increases by more than 5% (just over 10% of the time since 1980), so an increase of nearly10% is extremely high.  In fact, spending on healthcare services added 1.1% to economic growth, the largest contribution since records started to be kept in 1959 (it only exceeded 0.6% one other time).  Why would healthcare spending increase so much?  The Affordable Care Act or Obamacare.  Also, due to the harsh winter, spending on housing and utitities increased by the second highest rate in the last 25 years, adding 0.7% to economic growth.  On the flip side, business purchases of computers and peripheral equipment declined at the fastest rate since 1982, contributing to a decline in overall business investment.

What are the key takeaways from the report?  There were a lot of temporary factors affecting the data, so interpretation needs to be careful.  The biggest disappointment was the weakness in business spending, particularly on equipment.  Watch to see how this performs in the coming months to see whether the economy continues to grow at a modest pace or begins to accelerate.

Small Business in the Aftermath of the Great Recession

The most popular post on my blog involves comparisons of economics growth of small business vs. big business.  In Fall 2013, I wrote an article for the Rollins Graduate Business School Alumni Newsletter that examined the issue in more detail ("Small Business in the Aftermath of the Great Recession").  Recently, I made a brief presentation to the Winter Park Chamber of Commerce on the same topic.  What were the key takeaways from the article and presentation?  As one would guess, the rate of new business creation declined significantly during the recession while the rate of business destruction soared.  In recent years, the rate of business destruction has declined to at or below where it was prior to the recession.  Meanwhile, new business creation has improved, but still lags where it was prior to the crisis.

As a result, net business creation is still quite small compared to before 2007 (the most recent figures indicate that net new business creation is about half of what it was in the mid-2000s). According to the Business Employment Dynamics survey, small business (those with fewer than 50 workers) shed 3.6 million jobs during the recession, but recovered 2.2 million through the second quarter of 2013 (latest data available) for a net loss of 1.4 million jobs.  Meanwhile, large businesses (those with more than 500 employees) lost 4.3 million workers during the recession, but added 3.6 million through the second quarter of 2013 for a net loss of 700,000 employees (medium-sized businesses have experienced a net gain of 100,000 workers - loss of 1.6 million followed by a gain of 1.7 million).  Thus, it appears most of the remaining shortfall in employment is due to the underperformance of new and small businesses. Given that there was a financial crisis, access to credit played an important role in the relative weakness of small business.  The following figure illustrates the difference in the net tightening of lending standards for small vs. large business:

Thus, though lending standards began to ease in 2011 for large business, access to credit continued to tighten for small business before stabilizing in 2012 (preliminary evidence indicates that it eased in 2013).  It gets more complex, but it appears that tight credit due to the financial crisis had a larger impact on small business, helping to explain their relatively weak economic performance.  For those interested in more detail, feel free to read the article and.or view the presentation.

Fourth Quarter GDP

The government released its first estimate of GDP for the fourth quarter of 2013 this morning, showing 3.2% growth for the quarter and 2.7% compared to the fourth quarter of 2012.  The details were generally good, but some don't look sustainable.  Good news included consumer spending rising by 3.3%, it's fastest rate since the end of 2010.  On the flip side, residential investment fell at nearly a 10% rate, it's first decline since the summer of 2010.  Though residential construction may not grow as quickly in the coming year (compared to the double-digit growth seen in recent years, this was probably an aberration due to weather).  Business investment grew by just under 4%, somewhat slower than the middle of the year due to a decline in business construction).  The private domestic economy (consumers and businesses) grew by 2.4% in the fourth quarter compared to 2.25% in the third and 2.2% in the second (i.e., growth has been relatively stable, but increasing slightly).

Exports added 1.5% to economic growth, the second strongest contribution since the end of the recession. Given the state of the global economy, this is unlikely to be repeated (exports may do fine, but are unlikely to grow as rapidly as at the end of 2013).  Federal government purchases fell by 12.6% due to both cuts in defense spending as well as nondefense spending (as a result of the government shutdown). Given the recent passage of the budget covering the next couple of years, this is unlikely to be repeated.  After adding about 1.7% to economic growth in the third quarter, inventories added 0.4% to growth in the fourth quarter. Though inventories have added to economic growth throughout 2013, that's unlikely to be repeated in 2014.

What does this report tell us about the economy?  First, you'll note that the analysis keeps using the phrase. "this is unlikely to be repeated."  Exports and inventories are unlikely to add as much to economic growth in 2014 while residential investment and government purchases are unlikely to subtract as much from growth as they did at the end of 2013.  So what's the likely direction of economic growth?  Though some consumers still face headwinds (student loan debt, modest growth in incomes, ...), it appears that much of the deleveraging as a result of the financial crisis is over.  As such, consumer spending will pick up compared to recent years.  Combine this with moderate growth in business investment and you get economic growth approaching 3% in 2014.  If the US does grow by 3%, it'll be the fastest pace of economic growth since 2005.

The Latest Economic Reports: GDP and Employment

The government released two economic reports last week which, on the surface, indicates that the economy was strengthening in the second half of 2013.  Of course there's more to it than that.  Economic growth for the third quarter was revised up to 3.6% (from an initial report of 2.8%).  Does that mean growth and demand were picking up?  Not quite.  About half of the growth for the quarter was due to an increase in inventories; final sales rose by 1.9% (in line with the previous trend).  In fact, both consumer spending and business investment increased at a slower rate in the third quarter compared to the second quarter.  This was offset somewhat by somewhat faster growth in state/local government spending.  Also, another measure of economic growth, gross domestic income, rose by 1.4% in the third quarter (after growing more quickly than GDP in recent quarters).  What does this mean?  More of the same.  The recent trend in economic growth has been about 2%.

The other major economic news was the November Employment report, which showed an increase of 203,000 jobs with the unemployment rate falling to 7%.  Is this good news?  Yes, but not as good as it appears on the surface.  If you have read this blog before, you probably know what's coming next.  The main reason for the decline in the unemployment rate in recent months (and recent years) is the decline in the participation rate (a smaller portion of the population participating in the job market).  The participation rate fell from 63.2% in September to 63% in November (was 62.8% in October).  If it had remained at 63.2%, the unemployment rate would have been 7.3% in November (a slight increase rather than a decline of 0.2%). The quality of the jobs added appeared to improve somewhat in November compared to previous months, with a higher portion of jobs in relatively high-paying industries such as construction and manufacturing and a smaller share in relatively low-paying industries compared to previous months.

Together, the two reports suggest that the economy continues to grow at a modest pace: an underlying growth rate of 2% with about 200,000 jobs per month.

An Initial Look at First Quarter GDP

The first estimate of first quarter GDP was released this morning and it showed that economic growth was less than the consensus estimate at 2.5% (consensus was about 3%).  The good news was that consumption rose by 3.2%, residential investment rose by 12.6%, and exports rose by 2.9%.  Why was the report weaker than expected?  Business investment rose by only 2.1% and defense spending declined by 11.5% (on top of a 22% decline in the fourth quarter of 2012).  After subtracting from growth at the end of 2012, inventories added about 1% to growth in the first quarter; subtracting inventories from GDP means that final sales rose by 1.5% in the first quarter.

How does this affect the outlook for the rest of the year?  The sluggishness in business investment indicates that businesses remain cautious and may indicate sluggishness in hiring as well (similar to  the March employment report). Though consumer spending grew at a quicker pace than any time since the end of 2010, it's unlikely to continue at that pace, given the expiration of the payroll tax cut at the beginning of this year (other data suggests that it started to hurt consumer spending late in the first quarter and that weakness will show up in the second quarter numbers).  On a more positive note, residential investment remains strong and is likely to continue to be the strongest point of the economy for the rest of 2013.  Also, it's unlikely that defense spending will continue to fall as quickly and thus will cease to be a drag on growth.

What's the key takeaways?  More of the same, but for different reasons.  The economy is likely to continue to grow at a modest pace, close to 2%.  Consumer spending will constrained by the reduction in disposable income resulting from the increase in the payroll tax.  Business investment, after rebounding strongly in 2010-2011, has grown modestly over the last year and is likely to continue on that path.  It looks like 2013 will be another year of slow recovery with modest economic growth.

A Look at the Past Week's Economic Reports

The government released several economic reports this past week, including a revision of fourth quarter GDP and personal income/spending for January.  The headline numbers show that, instead of shrinking by 0.1% in the fourth quarter, the economy grew by 0.1%.  Personal income declined by 3.6% in January, the worst month in 20 years, after rising by 2.6% in December.  What did we learn from these reports?  Not too much.

The GDP report contained minor revisions and still reflect an economy that is growing at a modest rate (the private sector continues to grow at close to a 2% rate, which is better than 0%, but nothing to brag about).

The personal income/spending report reflects the impact of the anticipation and reality of the tax changes.  Those who could shifted income into December 2012 to avoid the anticipated tax hikes, resulting in a surge in dividends and bonuses in December and a subsquent decline in January.  When was the last time the US saw such a shifting in income?  In the early 1990s after the election of President Clinton, who promised to increase taxes on the rich during the 1992 campaign; the result was a surge in income in December 1992 to avoid the higher taxes and decline in January 1993 (so that's why this January was the largest decline in 20 years).

More importantly, consumer spending, adjusted for inflation rose by 0.1% in both December and January, reflecting a slowdown from the Fall of 2012.  The savings rate, which rose in December due to the temporary surge in income, declined to 2.4% in January, the lowest since November 2007 (right before the start of the recession).  Given the conisderable noise in the data, it's important to watch how things unfold in the coming months.

What are the key takeaways?  The economy was sluggish as 2012 came to an end and consumer spending continues to move forward, but at a slow rate.  It's still a little too early to tell how much of a hit consumer spending will take from the payroll tax hike.  Early evidence indicates that low and moderate income consumers are struggling, which should contribute to a sluggish economy in the first half of 2013.  Though not part of this post, it should be noted that housing is now the strongest part of the US economy (growing at a double-digit rate over the last year), helping to offset weakness in consumer spending and reductions in government spending.

A Second Look at Third Quarter GDP

This morning, the government released revised estimates of third quarter GDP.  Though the headline number looks good (by today's standards!), there's less than meets the eye (no, I'm not trying to be negative).  Economic growth was revised up from 2% to 2.7%.  However, growth in consumer spending was revised down from 2% to 1.4% and business investment declined by 2.2%, its worst showing since 2009 (led by the first decline in investment in equipment and software since the end of the recession).  So why was economic growth revised upward?  Higher government spending, more inventories, and fewer imports (due in part to weaker consumer spending).  Private demand (i.e, excluding inventories and government spending) rose by 1.26%.

So what's the takeaway?  The economy continues to move forward, but slowly.  Consumer spending was sluggish in the spring and summer while business investment has weakened considerably.  The combination of rising inventories and modest consumer spending suggests limited production in the coming quarters as businesses seek to trim their inventories to get them back in line with sales.  Most forecasts estimate that the economy will remain sluggish through the middle of next year, growing by between 1.5 and 2% in the fourth quarter and between 1% and 2% in the first quarter of 2013 (see my forecast page).  Of course the what happens to the fiscal cliff will have a lot to say as to the direction of the economy as we enter 2013.  Given the likelihood of the end of the payroll tax cut, which will result in a 2% tax hike for most Americans beginning in January 2013, consumer spending will remain sluggish at best in the coming months.  Are there any bright spots?  Believe it or not, residential investment has grown by 13.7% in the last 12 months (from a depressed rate) and is now the fastest growing segment of the economy.

Third Quarter GDP Report

The government released its initial estimate of GDP for the third quarter and it came in slightly higher than expected at a 2% annualized growth rate (compared to 1.3% in the second quarter and 2% in the first quarter).  Consumer spending rose by 2%, federal government spending (led by defense) rose by 9.6%, and residential investment rose by 14.4%.  On the downside, business investment declined by 1.3% and exports fell by 1.6%.  The primary contributors to the faster growth were government spending (went from subtracting 0.1% from growth in the second quarter to adding 0.7% in the third quarter) and consumer spending which added 1.4% to growth in the third quarter compared to 1.1% in the second quarter.

What does the report suggest about the strength of the private sector?  Here's a chart of final private demand over the last 5 years (includes consumption, fixed investment (not inventories), and net exports):

 

 



After posting a gain of 3% in the first quarter of 2012, the growth rate of private demand has declined to 1.9% in the second quarter and 1.4% in the third quarter (the lowest growth since the summer of 2010).  Thus, while the the headline number showed slightly faster growth, the underlying strength of the private sector seems to be slipping.

A major reason for this slowdown is the weakness of business investment in equipment and software:

After growing at about a 10% rate in 2010 and 2011 and 5% in the first half of 2012, investment in equipment and software was flat (tiny negative) in the third quarter, the weakest performance since the Spring of 2009 (at the end of the recession).  In addition, exports declined for the first time since the first quarter of 2009, reflecting the global economic slowdown.

What's the takeaway?  The economy continues to struggle, still growing but at a low rate with some signs of increasing weakness in the private sector.

This Week's Econonomic Update

There were a few key reports about the economy this week.  Economic growth for the Spring was revised down to 1.3% as both consumer and business spending grew more slowly compared to previous periods.  After contributing 2.5% to economic growth at the end of 2011, inventories have been a drag on growth in the first two quarters of 2012, which is not bad news.  Companies probably found themselves with too much inventory and now are making adjustments to get back in line with consumer spending.  Speaking about consumer spending, it has risen by 1.9% over the last year, contributing to the sluggishness of the recovery.  Over that same period, inflation as measured by the PCE deflator (average price of consumer goods and services in GDP) rose by 1.6%.

On Friday, there was another report about the state of the consumer (updated for August 2012).  Real personal income (real means adjusted for inflation) declined by 0.1% in August while real consumer spending rose by 0.1%.  As a result, the savings rate declined to 3.7% (down from 4.1% in July).  Consumer spending is on pace to grow by about 2% for the third quarter, slightly faster than the Spring.  Meanwhile, consumer prices have risen by 1.5% since August 2011 while core consumer inflation is 1.6%.

Add it up and you still get a sluggish economy with below-average inflation.  The next big economic report is this Friday's report on the job market.  Currently, the consensus is for just over 100,000 jobs created with little change in the unemployment rate.

First Look at GDP for the Second Quarter

The government released its first look at GDP for the second quarter of 2012 along with revisions to estimates from previous years.  Economic growth in the Spring was 1.5%, close to expectations and confirming the sluggishness economy.  Business investment in equipment led the growth, rising 7.2% followed by exports, which rose by 5.3%.  A minor plus was an increase in consumer spending on services, which rose 1.9% (not strong, but more than any quarter since it rose by a similar amount in 2011Q2.  Both consumer purchases of goods and business investment in structures weakend considerably, and were the lowest growth rates in a year.  Government purchases also continued to be a drag on the economy.  Removing inventories, final sales grew by 1.2%, the slowest rate since early 2011.  Inflation as measured by the PCE index declined to 0.7%, the lowest rate since Spring 2010.  Over the past year, inflation has been 1.6% while core inflation has been 1.8%.

As is customary, the government revised prior data based on new information.  The recession was slightly less severe, "only" a decline of 4.7% (still the largest decline since the Great Depression), and the initial stage of the recovery was weaker than initially reported (2.4% growth in 2010 instead of 3%).  Much of the downward revision for 2010 was due to more moderate increase in equipment investment than previously thought.  The economy came very close to shrinking in the first quarter of 2011, with growth not reported at a 0.1% annualized rate, but rebounded in the second quarter, growing 2.5%, nearly double the prior report.

The two strongest quarters of economic growth since the end of the recession were the fourth quarters of 2009 and 2011.  In both cases, much, if not all, of the growth was due to a sruge in inventories and thus were not sustainable.  In 2009Q4, the economy grew by 4%, but if you subtract the impact of inventories, it actually declined by just over 0.5% while in 2011Q4, the economy grew by 4.1%, but only by 1.6% once inventories are excluded.

What did we learn from today's report?  Revisions to previous data still show a severe downturn in 2008-2009 followed by even a more modest recovery than previously reported in 2010.  Data for the second quarter of 2012 still show an economy that is growing, but quite slowly.  Corporate profits declined in early 2012 for the first time since 2011Q1.  After boosting profits for years, overseas profits declined by the most since the recession, reflecting the global slowdown including the recessions in Europe.  What happens to the economy in the rest of 2012 depends on whether consumers and businesses are strong enough to offset problems from overseas (and from Washington, DC!).  As of now, it looks like a continuation of slow growth.

GDP and the Income/Spending Report

It's time to catch up on recent reports about the economy.  Last Friday's GDP report was somewhat surprising, given the composition of economic growth.  While consumption rose moderately (somewhat high by current standards), business investment actually declined.  This was likely due to policy issues as some companies moved investment into the fourth quarter of 2011 to take advantage of expiring tax breaks.  But even with that, investment growth over the last 2 quarters was lower than any time since the Winter of 2009-10.  Investment in equipment grew at an annualized rate of 4.5% over the last 6 months compared to nearly 11% in the previous 6 months.  After surging in the Spring and Summer of 2011, investment in structures has declined by about 6.5% in the Fall and Winter (seasonally adjusted, annualized rate).  Together, this suggests that the bounceback in investment following the end of the recession is over and firms are now basing their investment decisions on expected economic conditions.

Meanwhile, though consumption was a strong point in the GDP report, the income/spending report released on Monday indicates that consumer spending was slowing down as the first quarter came to an end.  After increasing at an annualized rate of nearly 5% in January and February, growth in real consumer spending slowed to just over a 1% rate in March.  At the same time, real disposable income was flat for the quarter, resulting in a lower savings rate (i.e., more spending with flat income results in less savings).  This implies that unless income starts to increases more quickly, consumer spending should slow down in the coming months.

Given a slowdown in investment growth and slower, but moderate growth in consumer spending, economic growth should remain moderate through the rest of 2012 (barring some external shock, such as from Spain).  As discussed elsewhere, moderate economic growth means that employment growth should also moderate, as already seen in the March employment report.  This doesn't mean that the economy is going to worsen, but that it should continue to grow at a modest pace.

latest GDP report

The government released it's revised estimate of fourth quarter GDP yesterday and it contained something for everyone.   The headline number was boring - the estimated growth of GDP remained at 3%.  However, beneath the surface there was quite a bit of interesting information.  There are different ways to measure the size of the economy including GDP and GDI, which should result in the same number.  GDP (gross domestic product) estimates the size of the economy by combining total spending on goods and services produced in the US by consumers, business, government, and the rest of the world.  As most people know, this is the number that gets the most attention.  However, GDI (gross domestic income) is also a measure of the size of the economy and is estimated by adding the total income earned throughout the economy.  Without getting into too much detail, the two numbers should be the same, differing only by measurement error (which is likely given a $15 trillion economy).  The two numbers tend to track each other over time and differ only slightly.  However, for short periods of time, they may paint somewhat different pictures of the strength of the economy.  Some economists favor emphasizing GDO instead of GDP, making the case that it provides a more accurate picture of the economy (for example, click here).

While GDP indicated that the economy grew by 3% in the fourth quarter, GDI showed a stronger growth rate of 4.4%.  Though GDI showed a weaker economy in the past, it points to relatively stronger growth in the second half of 2011.  Some economists are thinking that may help explain the stronger than expected employment growth in recent months.

There was also information in the report for pessimists.  When one strips out inventories (goods produced but not yet sold, etc.), instead of 3% growth, the economy grew by 1.1% in the fourth quarter.  A build up in inventories also implies less need for production in future quarters.  In addition, the growth in corporate profits declined.  This isn't too much of a surprise since corporate profits had been soaring, but the growth of profits was still less than expected.

So how's the economy doing?  Better, but still dealing with the effects of the crisis and facing headwinds from oil, Europe, and perhaps China.

State of the Economy: Economic Growth vs. Job Market

Depending on where you look, the economy is either continuing to grow at a modest pace or beginning to accelerate.  Economic growth was about 1.6% over the last 12 months, which is likely to rise to about 2% when first quarter GDP is released next month.  Meanwhile, employment growth has increased recently, rising just over 1.5% for the last year, but at an annualized rate of 2.3% so far in 2012.  So GDP is plodding along while the job market appears to be strengthening.  I decided to take a deeper look into this to see how it compares to past economic recoveries.  Let's take a look at a couple of charts to examine this relationship.  The first chart simply presents economic growth and employment growth over the previous 12 months (blue line is economic growth, red line is employment):


As you can see, the blue line is normally above the red line (economic growth typically exceeds employment growth).  With few exceptions, employment growth only exceeds economic growth near the beginning of recessions.  Let's look at it from another perspective.  Another measure of the job market is the aggregate hours worked.  Many economists see this as a more precise gauge of the job market since it not only accounts for the number of jobs, but also how many hours people are working on the job.  By taking the ratio of GDP to hours worked, one gets an estimate of productivity (output per hour).  The following chart shows the behavior of GDP per hour over time.



From this chart, it is evident that the current recovery is similar to but also different from past recoveries.  When the economy comes out of a recession, GDP per hour typically grows quickly as evidenced by the recoveries of 1970, 1975, 1983, and the current recovery.  As the expansion takes hold, the surge typically subsides.  The average difference betweem economic growth and employment growth over the period was 1.5% (so when economic growth is 2.5%, employment growth tends to be about 1%).  What's different this time is that it didn't just moderate as in the past, but is actually shrinking by 1%, which is lower than virtually any other period since data for hours worked became available (only comparable decline was during the severe recession of 1974, when it also declined by 1%).  The only other time in which it shrank without leading to or being in a recession was in 1994.

I'm not predicting a recession, but pointing out that it would be unprecedented for the job market to continue to improve unless economic growth strengthened significantly.  Given consensus forecasts of modest economic growth (about 2.5% for 2012), the recent strengthening of the labor market is unlikely to be sustained (current pace would result in about 3 million jobs this year).  If employment grew by about 1.5% in 2012, that would still mean a gain of about 2 million jobs.  Of course many factors will determine the outcome including the European recession, the slowdown in China, rising gas prices, etc.  The key point is that the performance of the job market must eventually reflect what's happening to economic growth.

Interesting Chart: Private vs. Public Economic Growth, 2008-2011

Some interesting charts from the Treasury Notes column of the US Treasury.  The one that caught my eye was the following:As can be seen, the decline in the prviate economy, as represented by nonfarm business, was even more severe than GDP in late 2008/early 2009 (2008Q4: 8.9% decline in GDP vs. 12.7% decline in nonfarm business; 2009Q1: 6.7% decline in GDP vs. 8.7% decline in nonfarm business).  This was offset somewhat by government's positive contribution to GDP (at least in the short run).  However, the government has been a drag on the economy since the summer of 2010; state and local governments have subtracted from GDP since Spring 2009.

Latest reports on GDP, Income, and Spending

The BEA released revised figures for fourth quarter economic growth, indicating that the economy grew at a 3% annualized rate, a little faster than first thought.  There were minor changes: a slightly smaller increase in inventories and a slightly larger increase in spending, but it still means that most of the growth was due to a build up in inventories, with final sales increasing at just over a 1% rate.  On a more positive note, GDI (gross domestic income) was revised up, resulting in a higher savings rate, suggesting that consumers may be in slightly better shape than previously estimated.
This morning, information on income and spending was released, showing a slight decline in disposable income adjusted for inflation and no growth in inflation-adjusted consumption.  That means consumption has been flat for 3 straight months.  Given that disposable income is just barely keeping pace with inflation, consumption has been and is expected to continue to remain constrained.  Meanwhile, inflation as measured by the PCE index declined to 2.4% over the last year, after approaching 3% last summer.  Excluding food and energy, inflation was about 2% over the last 12 months.

Add it up and it continues to tell the same story: a sluggish recovery as consumer spending is held back by sluggish growth in income and continued deleveraging.

Fourth Quarter GDP

This morning's report on fourth quarter GDP was a little disappointing, showing economic growth of 2.8%, which was below expectations.  Growth in personal consumption, the largest portion of the economy, grew at a 2% annual rate, which was in line with recent trends and didn't reflect the burst that some were expecting.  Spending on motor vehicles did surge, but spending on services was relatively flat.  Federal spending subtracted from GDP, led by a significant decline in defense spending (mainly reflecting the timing of purchases).  On a cautionary note for future economic growth, inventories were responsible for just under 2% of economic growth; thus final sales to domestic producers rose by only 0.9%.  In other words, when one removes the effect of a build-up of inventories, economic growth was under 1%.  The build-up in inventories suggests that future production will be constrained.
After rising to above 6% during the recession, the savings rate has declined to 3.7%, the lowest since 2007.  One reason is that real disposable income per capita was flat for the quarter and down for the year.  This raises concerns about consumer spending as we move into 2012.  On a more positive note, inflation as measured by the PCE deflator rose only 0.7%, the lowest since Spring 2010, reflecting a slowdown in inflation.

Overall, a weaker than expected report that continues to confirm a modest economic recovery without evidence of speeding up any time soon.

A First look at third quarter GDP

Today's GDP report came in as expected, with economic growth of 2.5% in the third quarter.  Business investment continues to be a strength, increasing at an annualized rate of 16.3% (both equipment investment and investment in structures performed well).  Consumer spending increasing at a slightly faster pace than in the second quarter (2.5%), led by a bounceback in purchases of durable goods.  Inventories grew more slowly, thus subtracting about a percent from economic growth (a good sign that companies are not likely to face a need to significantly reduce inventories in the coming quarters).  So far, it sounds like a pretty good report.  However, real disposable income declined at a 1.7% annual rate, following a 0.6% increase in the second quarter.  It was the first decline since 2009 and real income per capita is now slightly below what it was in Spring 2010.  Add it up and it points toward a continuation of a sluggish recovery as consumers remained constrained by stagnant income and high debt levels.

Some "good" news, some concerns

There were a few pieces of somewhat good economic news released today; "somewhat good" means they point to slow growth as opposed to a recession.  Unemployment claims declined by quite a bit, to below 400,000, but this would need to continue in upcoming weeks to confirm that it was not a fluke (seasonal and technical factors played some role in the decline according to the Labor Dept.).  The BLS released preliminary estimates of revisions to employment data which indicated that there were 192,000 more jobs than originally estimated as of March 2011, 140,000 of which were in the private sector (revisions will be made official in Feb 2012).  That would still leave the economy down 6.7 million jobs since the start of the recession, but every little bit helps!  Finally, new estimates indicate that the economy grew at a 1.3% in the second quarter, slightly more than previously estimated.  Inventories increased at a slower rate than previously estimated while consumption was stronger than earlier estimates.

One piece of data that I follow closely is the risk premium for investment-grade corporations (Baa corporate bonds).  It reached a post-Depression record in late 2008 of just over 6% before declining to about 2.5% following the end of the financial crisis.  As of yesterday, it was back up to 3.39%, the highest for any non-recessionary period other than immediately after 9/11.  That suggests that there is significant stress in financial markets, most likely due to the poor economic outlook and risk aversion resulting from the European debt crisis.