4Q2011 Gross Domestic Product: Advance Estimate

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The Bureau of Economic Analysis (BEA) estimated 4Q2011 growth in real U.S. gross domestic product (GDP) at a seasonally adjusted and annualized rate of 2.8 percent, up from the final estimate of 1.8 percent in 3Q. Private domestic investment (PDI) – especially private inventories – and personal consumption expenditures (PCE) contributed to 3Q growth in that order, while net exports (NetX) and government consumption expenditures (GCE) exerted “drags.”
 

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Consumer Metrics Institute made the following observations:

-- The annualized growth rate for consumer expenditures for goods was sharply higher at 1.34 percent, up over one percentage point from the 0.33 percent rate reported for 3Q2011. On the other hand, consumer services plummeted -- losing 0.80 percentage point as the growth rate fell to 0.10 percent. This is likely a sign of both dropping demand and eroding prices within the consumer services sector. This drop in the consumption of consumer services offsets the bulk of the increase in spending on consumer goods, with the aggregate contribution to the headline number ending up at only +0.21 percent.

-- The growth rate of private fixed investments also dropped significantly to 0.41 percent, over one percentage point lower than the 1.52 percent annualized rate reported for 3Q.

-- The growth rate of inventories represented the true "wild card" in the report, swinging from a 3Q contraction of -1.35 percent to a newly reported growth rate of +1.94 percent -- a change of nearly +3.3 percentage points in its contribution to the headline number. This apparently wild swing could be the result of either real changes in inventory levels or phantom changes as commodity prices firmed inventory valuations after dropping dramatically during 3Q. If the changes are real, it is likely that manufacturers were rebuilding inventories after being overly cautious during 3Q, following their classic pattern of a lagging over-correction. In that scenario we should expect this line item to revert to long-term trend lines during 1H2012, lowering the headline numbers at that time. However, if the numbers are the phantom result of changes in commodity pricing (particularly oil) impacting inventory valuations even as physical levels remain largely unchanged, then the headline number is largely meaningless and we can expect the quality of the GDP numbers to continue to be held hostage by the BEA's price deflators. [Ed note: Given that the quarter-to-quarter percentage change in the GDP deflator was in line with the changes in both the CPI-U and PPI, we tend to think CMI’s inventory-building hypothesis is the correct one. For more on that topic, see our blog post Of GDP Growth and Deflators: Smoke and Mirrors? ]

-- Another major swing in the numbers concerned total expenditures by governments at all levels, which is now contracting at a -0.93 percent annualized rate (a significant weakening from the -0.02 percent rate during 3Q) -- a rate that continues a string of five consecutive quarters of contraction. It also reflects a change to annualized contraction at all levels of government (Federal, state and local) -- and most notably in Federal defense spending.
 

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The 4Q GDP estimate leaves the recession call made by Federal Reserve analyst Jeremy Nalewaik essentially unchanged. Nalewaik’s analysis correlated the onset of recessions with a fall in the year-over-year change in gross domestic product (GDP) below 2 percent. Since 1947, the U.S. economy either was already or soon would be in recession each time the year-over-year change in GDP fell below 2 percent (the red dashed line in the figure above). The year-over-year GDP change stood at 1.56 percent in 4Q.