US GDP: Good And Bad Signs
It turns out – according to the advance estimate by the Bureau of Economic Analysis, anyway – that the US economy contracted by 3.8% on a quarter-on-quarter annualised basis. Your friendly neighbourhood Watchdog has the data in front of him, and can report that there is both good and bad news to take from the report. So, in alternating order:
Good news: The consensus estimate for the quarter was -5.4%, so the result beat expectations.
Bad news: The growth in inventories contributed 1.32 percentage points to the still dismal -3.8% figure, without which growth would have come in at -5.1%. While statisticians consider the buildup in inventory stocks to be ‘growth’, here in the real world that figure indicates that many goods remain unsold. When they are liquidated in 2009, at bargain bin prices, this positive effect will turn decidedly negative.
Good news: Despite what most would consider the worst recession in decades, which began (officially) in December 2007, the US still managed to post a positive growth figure for the year as a whole: 1.3%. That was the same forecast that Business Monitor International (BMI) established in the summer of 2008.
Bad news: The factors that produced that positive growth figure give more cause for concern than for hope. Of the 1.3% increase, 0.58 percentage points (nearly half of growth) came from government expenditure and investment, not exactly a sign of dynamic private sector growth.
Good news: For the year as a whole, net exports contributed 1.41percentage points to headline growth – in other words, without the net contributions of the external sector, the US economy would have contracted. That was the Watchdog’s chief thesis for believing that US growth would remain in positive territory despite a poor domestic performance.
Bad news: A good chunk of that contribution was from a drop in imports, which corresponds to the proverbial death of the American consumer over the course of 2008. And in the fourth quarter, external trade collapsed: exports of goods shrank by 27.7% (annualised) and imports by 15.7%. Not to be dramatic, but to illustrate the point, four years with a quarter like Q408 would mean that the US would be exporting virtually nothing. This is bad for the global economic outlook, too.
Good news: Unlike earlier in the year, inflation is no longer a problem: the Personal Consumption Expenditure deflator was -5.5%, and the overall GDP deflator was -0.3%.
Bad news: That’s deflation, which is exactly what the Federal Reserve and the rest of Washington are trying to avoid. And with the deflator coming in negative, and real growth also coming in negative, we have an unusual contraction of the US economy in nominal terms: -4.1% annualised, according to the latest data. If we estimate US annual nominal GDP at US$14-15trn, that’s a cool US$500bn off of nominal GDP, which is the equivalent of wiping Switzerland, Sweden or Norway off the map.
All in all, the report was more negative than positive, if you are looking ahead into 2009. I’m looking for a more disastrous year than the consensus estimate, at -2.3%, versus most estimates in the -0.5 to -2.0% range.