Gross Domestic Product (GDP) grew 2.8% in the fourth quarter, a nice acceleration from the 1.8% posted in the third quarter and the 1.3% it grew in the second quarter. It was on the other hand well short of expectations for 3.1% growth. The quality of the growth was also disappointing. Inventory build up accounted for 1.94 points of that growth, while in the third quarter, inventories were a huge drag of 1.35 points. In other words if we factor out the effect of inventories, the economy actually slowed dramatically in the fourth quarter, growing just 0.86% rather than 3.15%.
Consumer spending (PCE) added 1.34 points of that growth, mostly coming from spending on durable goods, which chipped in 1.07, while spending on non durable goods contributed 0.27 points and spending on services added just 0.10 points, Consumer spending makes up about 71% of the economy, and Durable Goods is the smallest portion of that, about one sixth of the total consumer spending, while non durable gods is twice as large, and spending on services is twice as large as that of non durable goods. The big swing factor on the durable goods side was Cars, which alone was responsible for 0.86 points, up from just 0.04 points in the third quarter.
Business spending on equipment and software still helped growth, but not nearly to the extent it has in previous quarters. Adding just 0.39 points of growth down from 1.12 points in the third quarter. Businesses actually invested less in structures than they did in the third quarter and it turned into a 0.21 point drag instead of being a 0.37 point contribution as it was in the third quarter.
Reduced government spending was also a massive drag on economic growth, subtracting 0.93 points from the total. On the Federal side, the drag was 00.62 points, down from a 0.17 point contribution in the third quarter. Lower defense spending subtracted 0.58 points instead of higher spending adding 0.27 points. Non defesnse federal spending added 0.11 points instead of lower spending cutting 0.10 point. The drag from State and Local Spending increased to 0.32 points from 0.19 points in the third quarter. This is the sixth straight quarter, and the 11th out of the last 13, that cuts in State and Local spending have slowed the overall economy,
All in all, a very disappointing report. Not just lower than expected in terms of the level of growth, but very weak on the quality of growth as well. I will put a more detail examination of the data up on the regular blog later in the day.
