Saturday, January 31, 2015

GDP still pretty darn good

Today’s big economic story is that GDP figures came out for the 4th Quarter of 2014, and a lot of the financial media is portraying the 2.6% growth shown in the release as disappointing. Apparently the “experts” were thinking growth should have topped 3% after the blowout growth in the 2nd and 3rd quarters (4.6% and 5.0% growth, respectively), but a look inside these figures indicate the economy was still on good footing as 2014 ended.

If you take a look at the Bureau of Economic Analysis’ release, you can break out the four large GDP components. What this shows is that U.S. consumers spent strongly in the last 3 months of the year, and the only things that held 4th Quarter growth under the 3.0% figure were cutbacks in government spending (particularly military spending) an increasing trade deficit. Table 2 of the BEA release has these figures if you want to follow along.

Contributions to GDP growth, 4th Quarter 2014
Consumption +2.87% to GDP, (+4.3% vs Q3)
Investment +1.20% to GDP (+7.4% vs Q3)
Federal Gov’t -0.54% to GDP (-7.5% vs Q3)
State/Local Gov’t +0.14% to GDP (+1.3% vs Q3)
Exports +0.37% to GDP (+2.8% vs Q3)
Imports -1.39% to GDP (8.9% more imports than Q3)

The increase in imports makes sense, given the increase in consumption along with the increasing strength of the dollar (which makes imported items cheaper for Americans to buy). Even with that, private sector GDP expanded by more than a 3% annual rate for this quarter, and remained headed in the right direction.

Overall growth for the year from the end of 2013 to the end of 2014 is now estimated at just under 2.5%, which isn’t that bad, and keeps overall GDP on the modest but relatively steady growth line that we’ve seen for the 4 ½ years of the Obama Recovery.

Looking ahead, it’ll be interesting to see what effect the dropping price of gas will have on overall consumption numbers (both of gas itself and on other goods with the extra money left over), and also if the lower inflation numbers start helping to make real GDP growth go higher. On the flip side, the improving dollar and bad overseas economies may raise the trade deficit, and make that Net Exports number be even more of a drag on GDP than the -1.02% it was in this quarter.

But despite the naysaying from the Wall Street and DC media, I think today’s report shows that U.S. GDP growth was in a good place at the end of 2014, with a strong final 3 quarters of increases of both jobs and output. But now we start looking ahead to what the beginning of 2015 holds, and with high volatility in both jobless claims and the stock market, it feels like things could go either way for growth over the next few months.

For more analysis on the GDP report, I'll forward you to Econbrowser with thoughts from James Hamilton, who notes that GDP expanded at an annual rate of growth over 4% for the last 9 months of 2014, and also UW-Madison's Menzie Chinn.

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