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Economy in Brief

US 4Q GDP Weak Due To Lower Autos & Lower Defense
by Tom Moeller January 27, 2006

US real GDP growth last quarter weakened to the slowest in over four years. Even when the 1.1% advance is combined with 3Q, the 2.6% average gain was the weakest since early 2003 and fell short of Consensus expectations for a 2.8% rise.

Domestic demand growth suffered due to a collapse in the demand for autos. Sales incentives had pumped up 3Q vehicle & parts demand by 12.6% (AR) but the 44.9% decline last quarter pulled the demand level to its lowest since 2001. As a result, real PCE grew just 1.1% (3.0% y/y) during 4Q05.

Outside of autos, real consumer demand was firm last quarter as suggested by a 12.5% (10.6% y/y) advance in furniture & household appliances, a 10.8% (6.6% y/y) rise in apparel and a 3.2% (2.9% y/y) increase in services spending.

Business fixed investment also eased due to a shortfall in spending on transportation equipment, off 17.6% (+1.5% y/y). Investment in industrial equipment rose 10.6% (5.6% y/y) and spending on information processing equipment & software rose 9.1% (13.7% y/y).

Lower defense spending, which reversed all of the 3Q gain with a 13.1% (+0.5% y/y) decline, lowered government spending by 2.4% (+1.2% y/y). The decline in defense subtracted 0.7% percentage points from 4Q GDP growth.

Growth in residential investment eased to 3.5% (7.7% y/y), the slowest quarterly advance in a year.

The drag on GDP growth from a wider foreign trade deficit ballooned to 1.2 percentage points as imports grew 9.1% (4.6% y/y), the fastest rate of growth in a year. Exports rose 2.4% (5.7% y/y), steady with the 3Q rate of growth.

Countering the drag from foreign trade, inventories contributed a large 1.5 percentage points to GDP growth, the most since early 2002.

The chain price index grew 3.0% versus a Consensus expectation for a 2.5% rise. The upside surprise during 4Q was due to a 4.9% (3.5% y/y) increase in the price index for private fixed investment which raised the price index for domestic final sales by 3.4% (3.5% y/y).

Global Economic Expansion Rolls On Into 2006 from the Federal Reserve Bank of Atlanta can be found here.

Chained 2000$, % AR 4Q '05 (Advance) 3Q '05 Y/Y 2005 2004 2003
GDP 1.1% 4.1% 3.1% 3.5% 4.2% 2.7%
  Inventory Effect 1.5% -0.4% -0.2% -0.3% 0.3% 0.0%
Final Sales -0.3% 4.6% 3.3% 3.8% 3.9% 2.7%
  Foreign Trade Effect -1.2% -0.1% 0.0% -0.1% -0.5% -0.3%
Domestic Final Demand 0.8% 4.5% 3.3% 3.9% 4.4% 3.0%
Chained GDP Price Index 3.0% 3.3% 3.0% 2.8% 2.6% 2.0%
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