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Economic Policy Institute
GDP Picture
January 27, 2006
It's Not Just Autos: GDP Numbers Show Weakness in Most Sectors
The Commerce Department reported today that real gross domestic
product (GDP) grew in the fourth quarter of 2005 at the slowest rate
in three years1.1%, which is down from 4.1% growth in the third
quarter. While plunging automobile sales played the greatest role in
this slowdown (knocking 2.1% off of the growth number), weakness was
seen across the board as personal consumption expenditures, investment
in equipment and software, residential investment, net exports, and
government purchases all slowed relative to third-quarter growth
rates.
A striking finding is that final sales of domestic output (GDP minus
inventory change) actually shrank in the fourth quarter, falling by
0.3%. This reflects both weakness in domestic demand and a sharp rise
in the trade deficit (which knocked off 1.2% from GDP this quarter).
The 1.45 point contribution from inventory buildup will dampen future
GDP growth.
Equipment and software investment grew at the slowest rate since the
first quarter of 2003, and residential investment growth was the
lowest in a year.
While the negative automobile contribution to growth is the number
most people will notice about this report, the GDP numbers released
today show across the board weakness, with every major sector except
inventory accumulation slowing relative to the third quarter.
The 0.8% growth in domestic demand (final sales to domestic
purchasers, including net imports) was the lowest rate since the first
quarter of 2002. A large part of this weakness can be explained by
the continuing sluggish pace of real wage and salary income growth,
which edged up only 0.4% this quarter. Since the last business cycle
peak, real wage and salary income has risen only 5.5%, compared to a
historical average of 17%. Even the jobless recovery of the early
1990s saw real wage and salary growth of over 8% by this point in the
recovery. While consumers have offset some of this wage and salary
weakness with home equity cash outs (and negative saving rates), all
signs point to this dynamic ending. In short, what this economy
needs, and soon, is strong real wage and salary growth to finance
consumption going forward.
The trade deficit subtracted from growth for the 10th straight year,
while exports grew at only 2.4% in the last half of the year. It
would be easier for the U.S. economy to navigate out of the current
soft patch with better net export performance.
Lastly, this report provides a solid argument against the Federal
Reserve continuing to further raise interest rates next week. Core
inflation (inflation in market-based personal consumption expenditures
minus food and energy prices) remained at 1.8% for the quarter and
1.7% for the year. This tame inflation, combined with substantial
weakness in the broader economy, argues strongly for the Fed to stop
its campaign of interest rate hikes.
By EPI economist L. Josh Bivens
Copyright © 2006 by The Economic Policy Institute. All rights
reserved.
Linkname: GDP Picture, January 27, 2006
URL:
http://www.epi.org/content.cfm/webfeatures_econindicators_gdppi
ct_20060127
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