January 27, 2012

Fourth Quarter 2011 GDP Growth: Bright on the Outside, Not so Good on the Inside

Bruce Yandle

Distinguished Adjunct Fellow
Summary

GDP data on the economy’s 4Q2011 growth looked a lot like a leftover Halloween pumpkin: cheery on the outside but not so good when carved.

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GDP data on the economy’s 4Q2011 growth looked a lot like a leftover Halloween pumpkin: cheery on the outside but not so good when carved. Real GDP growth came in at a happy 2.8 percent, brighter indeed that 3Q2011’s 1.8 percent real growth. Even so, the 2.8 percent was slightly less than the 3.0 percent consensus forecast but a lot better than what I had expected. My examination of Federal Reserve Industrial Production data for the quarter and the Institute of Supply Management’s indexes suggested we would be lucky to see 2.0% growth. Well, it turns out that my prediction was not as far off as first appears, at least when we carve into the data.

Some 1.9 percentage points of the 2.8 percent growth is accounted for by inventory growth. This is stuff that was produced that did not sell. Take that away and we are left with 0.9 percent growth. But let’s not play games with numbers. Why might we have so much inventory accumulation? There are two possibilities. First, merchants and manufacturers nationwide expect to see a burst in consumer spending. They are building up for an expanding economy. In other words, the build-up is intentional. No problem. But what if the build-up is unintended? What if merchants and manufacturers expected to produce and sell more in 4Q2011 and it just didn’t happen. If that is the case, we are in for some slow sledding this quarter when inventories get adjusted downward.

Which of these two stories is apt to be the correct one? Data on 4Q2011 real final sales of domestic product showed growth of just 0.8 percent, as compared to 3.2 percent in 3Q2011. This suggests there was an unintended accumulation of inventories. And how much adjustment are we talking about? Recent GDP forecasts for 2012 rotate around 2.2 percent to 2.7 percent, which of course is a smaller number than the one we just saw for fourth quarter.

With the first estimate for 4Q2011 GDP growth, we now have an estimate for 2011’s overall growth. The number is a dismal 1.7 percent, which looks pretty sick when compared with 2010’s 3.0 percent. But a lot of bad news entered the making of the 2011 number. Magnified tax uncertainty in Washington, Japanese earthquakes and supply interruptions, southern European credit meltdowns, a trembling Euro community, and a first-ever modern credit downgrade for U.S. debt, just to mention some of the biggies. This is enough bad stuff to make a noxious witch’s brew.

We will receive a revised GDP growth estimate at the end of February. Will the number rise or fall? As bad as I hate to be pessimistic, my urge to be accurate tells me to look for a slightly lower number. At least that is what today’s data tell me.