GDP Byte
By Dean Baker
GDP Byte is published quarterly upon release of
the Bureau of Economic
Analysis' report on the Gross Domestic Product.
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Investment Falloff Slows GDP Growth
Non-residential investment declined for the
first time since the fourth quarter of 1991, as
GDP growth slowed to just 1.4 percent in the
fourth quarter of 2000. In addition to the drop
in investment, consumption growth slowed to a 2.9
percent annual rate, and exports also fell. Even
with the slow growth reported for the quarter,
inventories continued to accumulate at a rapid
pace, suggesting that there is likely to a
substantial drawing down of inventories in the
current quarter.
Non-residential investment declined at a
1.5 percent annual rate, driven by a 4.7 percent
decline in equipment and software investment.
This is a sharp turnaround in this category,
which has been experiencing double digit growth
rates through most of the last decade. Spending
in most categories of equipment fell, with
transportation equipment taking the hardest hit,
declining at a 37 percent annual rate. Spending
in this category was 13.3 percent below its year
ago level. There was a modest increase in
expenditures on computers, measured in chained
(inflation-adjusted) dollars, but current dollar
spending in this category actually declined.
Most categories of consumption had very
weak growth in the quarter. Durable goods
purchases fell at a 3.4 percent rate driven by a
12.7 percent decline in car purchases. Only a 5.3
percent rise in the demand for services kept
consumption spending reasonably healthy. This was
driven by a weather related 14.8 percent rise in
electricity and gas consumption, and an 8.2
percent rise in the "other" services component.
The drop in exports was striking, since
most economies elsewhere in the world continue to
grow at a healthy pace. However, a more careful
examination indicates that the decline in exports
may actually be directly linked to the slowdown
in the United States. Most of the drop in exports
was attributable to a decline in exports of
capital goods, and automobiles and automobile
parts. Many of these exports are to developing
nations, for the purpose of assembling goods,
such as cars, which will then be imported back
into the United States. With the prospect for
future imports dimming, the pace at which
corporations are shipping parts and machinery
overseas will also naturally slow. While import
growth slowed considerably in the quarter, with
the decline in exports, trade still subtracted
0.56 percentage points from the growth rate in
the quarter.
Inventories grew at a slightly slower pace
than in the third quarter, but the economy still
accumulated inventories at an annual rate of
$67.1 billion. By comparison, in 1995 and 1996,
before growth accelerated, inventories
accumulated at the rate of just over $30 billion
a year. The bulk of the excess inventories are
clearly in the retail sector, which had an
accumulation (at an annual rate) of $25.1 billion
in the quarter, the most rapid pace since the Y2K
scare in the fourth quarter of 1999.
Residential housing slowed slightly after a
sharp decline in the third quarter. This is
consistent with other data that indicates that
spending in this sector seems to have stabilized
at a considerably lower level than the peaks hit
last year.
A jump in federal government spending gave
a boost to growth in the quarter. Without the
government sector, the economy would have grown
at just a 0.9 percent rate in the fourth quarter.
While it is still way too early to make any
definitive judgements about trends in
productivity growth in this slowdown, it does
appear that the normal cyclical pattern is taking
hold. Output in the non-farm business sector grew
at a 1.2 percent annual rate for the quarter.
While hours growth is likely to be close to 0,
this still places productivity growth at close to
1.0 percent. Also, the divergence between gross
product and net product continues to grow, as the
share of GDP going to replace worn out equipment
increases. Net national product grew at just a
0.3 percent rate in the fourth quarter.
The savings rate slipped even further in
the quarter, as disposable income grew even more
slowly. The savings rate fell to -0.8 percent,
the second consecutive quarter that it has been
negative. If capital gains are included in the
savings measure, as some economists have
advocated, it would have been hugely negative,
since stocks fell sharply in the quarter. At the
least, the record low savings indicates that
consumption growth is not likely to spur the
economy at this point.
All the price measures continue to show
that inflation is well under control, with the
overall GDP price index rising at a 2.1 percent
annual pace. There is no evidence of the
inflation that prompted the Federal Reserve Board
to raise interest rates six times over the last
year and a half.
With consumption growth likely to remain
very slow, investment weak, and firms trying to
pare back their inventories, it is questionable
whether the economy will be able to sustain a
positive growth rate in the next two quarters.
