Fourth Quarter Real GDP on a Slippery Slope

Real GDP declined at an annual rate of 3.8 percent in the 4th quarter. However, that includes additional inventory "investment" worth 1.32 percentage points. Excluding inventory changes, "real final sales" declined at an annual rate of 5.1 percent, the more meaningful number since the inventory building was likely involuntary and doesn't auger well for the current quarter.

Additions and subtractions from growth from the 3rd to 4th quarter 2008 were as follows:

Real GDP -3.8 percent (third to fourth quarter)

Consumption (personal)                   -2.47 percentage points
Investment (private domestic)          -1.80 percentage points 
Net exports (goods & services)        +0.09 percentage points
Government spending                      +0.38 percentage points 

                                                     -3.80 percentage points

Keeping in mind that the 4th quarter numbers are "advance" estimates based on incomplete data and will be revised twice, the changes for 2007 to 2008 are as follows:

Real GDP +1.3 percent (2007 to 2008)

Consumption                                    +0.20 percentage points
Investment                                       -0.91 percentage points
Net exports of goods and services      +1.41 percentage points
Government spending                        +0.58 percentage points

                                                       +1.28 percentage points

The changes from the year as a whole to the 4th quarter are instructive. Net exports (exports of goods and services minus imports) remained a positive for GDP growth, but a smaller positive. Actually, we have negative net exports (imports>exports) which declined-a negative times a negative is positive. If the dollar continues to appreciate despite a remaining large trade deficit, net exports are likely to turn into a net negative.

In the last month (to November) both exports and imports declined, but imports declined more. The shrinkage of the deficit is good, but declining overall trade, which is going on worldwide, is not. A worldwide recession will only be exacerbated by a downward spiral in world trade.

Traditionally, we have to guard against competitive currency devaluations during recessions. Other protectionist measures are also a threat, including the inclusion of "buy American" features of the House stimulus bill-a very bad idea.

The accelerated decline in real GDP in the 4th quarter is matched by a sharp deterioration in the labor market — a topic for a separate post. We are in for a deep and likely prolonged recession.

For the official GDP report, click here.

Comments (1)

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  1. Jhanvi says:

    Buddy Pacifico: “One possible part of the dtamaric productivity gains may be that Construction has been much less a part of the economy the last three years.”I agree, Buddy.GDP is an aggregate number. It is possible – and I think likely – that high productivity industries have grown much faster the past three years than have low-productivity industries. If that is true, then aggregate output could easily increase significantly with far fewer workers.2010 GDP by industry data is not yet available. But the 2009 data show that telecommunications, insurance, computer services, hospitals, scientific/technical services, and banking all continued to grow through the recession. These are generally high productivity industries.At the same time, construction, trucking, food service, and accomodations industries shrunk. These are generally low-productivity industries.