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Economy in Brief

U.S. 4Q GDP Revised Down To Show Sharpest Drop Since 1980
by Tom Moeller February 27, 2009

The U.S. Bureau of Economic Analysis today reported that real GDP contracted at a 6.2% annual rate last quarter.  It was the largest decline since the "credit crunch" recession of 1980 and it exceeded Consensus expectations for a 5.4% drop.  One month ago, the initial report showed that GDP had declined at a 3.8% rate with expectations for a 6.0% decline. In the interim, estimates of virtually all the economy's components were weaker than suggested by certain "top down" estimates from the labor market, on which the early GDP estimates are partially based.  So, today's figure about matches month-ago Consensus forecasts.

The largest source of the downward revision to GDP growth came from inventory changes which added just 0.2 percentage points to growth instead of the originally estimate of 1.3 points. To some extent this news is somewhat positive for the GDP  outlook because it suggests that the "involuntary" accumulation was smaller. Therefore fewer inventories may need to be shed if demand remains under pressure.  The 4Q inventory addition to GDP growth followed three consecutive quarters of decumulation or modest accumulation as tight control methods kept inventories under wraps.

The next two sources of downward revision to 4Q GDP are a bit more problematic for the economic growth outlook.  

Real U.S. final sales to domestic purchasers contracted at a 5.7% annual rate which was greater than the 4.9% estimated last month.  Again, that was the worst decline since the notably sharp, "credit crunch" recession of 1980 when consumers pocketed their credit cards.  Personal consumption expenditures fell a downwardly revised 4.3% (AR) which was somewhat greater than the decline during 3Q.  Spending on motor vehicles declined at a huge 38.0% annual rate, which was quite a bit faster than the 26.6% decline logged in 3Q.  Spending on other durable goods also fell sharply (-0.7% y/y) as they did during the prior quarter.  Real spending on clothing fell at a somewhat easier rate (-2.7%) than during 3Q.  Business fixed investment fell at the same rate as estimated last month (-5.0% y/y) and the 22.2% decline in residential investment (-19.2% y/y) was in fact slightly less than initially indicated.  Combined, business plus residential investment declined for the tenth quarter out of the last eleven (-8.8% y/y).

The government sector contributed marginally to GDP growth last quarter. Activity rose at a 1.6% annual rate (3.3% y/y) led by a 6.7% (8.2% y/y) rise in Federal spending.

Finally, the foreign trade sector subtracted 0.5 percentage points from GDP growth instead of adding minimally.  It was the first negative contribution from trade to U.S. growth since 1Q 2007.  Exports fell at a deepened 23.6% rate (-1.8% y/y) as recessions intensified in economies abroad.  U.S. imports fell at a 16.0% rate (-7.1% y/y) with the developing domestic recession, which was about the same rate of decline estimated last month.

Adding to the overall downward estimate of GDP growth was an upward revision to price inflation.  The GDP chain price index increased at a 0.5% rate instead of falling minimally.  The source of the upward revision to the price index appears to have come from inventories.  The PCE price index fell at a 5.0% annual rate versus a drop of 5.5% in the initial report. prices. The residential investment chain price index fell at a 9.6% annual rate while the business fixed investment price index rose 4.6%, about as presented last month.

The U.S. National Income & Product Account data is available in Haver's USECON and the USNA databases.

Sources of the Great Moderation: shocks, friction, or monetary policy? from the Federal Reserve Bank of San Francisco is available here.ยท Ties that bind: bilateral trade's role in synchronizing business cycles from the Federal Reserve Bank of Dallas can be found here

Chained 2000$, % AR 4Q '08 (Preliminary) 4Q '08 (Advance) 3Q '08 4Q Y/Y 2008 2007 2006
GDP -6.2 -3.8 -0.5 -0.8 1.3 2.0 2.8
  Inventory Effect 0.2 1.3 0.8 0.1 0.1 -0.4 0.0
Final Sales -6.4 -5.1 -1.3 -0.7 1.4 2.4 2.8
Foreign Trade Effect -0.5 0.1 1.1 1.4 1.4 0.6 0.2
Domestic Final Demand -5.7 -4.9 -2.2 -1.7 0.0 1.8 2.6
Chained GDP Price Index 0.5 -0.1 3.9 2.0 2.2 2.7 3.2
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