U.S. 4Q GDP Revised Down To ShowSharpest Drop Since 1980

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.· Ties that bind: bilateral trade's role in synchronizing business cycles from the Federal Reserve Bank of Dallas can be found here. 

The University of Michigan reported that its February reading of consumer sentiment fell a sharp 8.0% month-to-month, about equal to the mid-month read. That nearly reversed all of the gains of the prior two months and returned the index to its lowest level since 1980. The latest figure was down 20.5% from last February and the reading about matched Consensus expectations. During the last ten years there has been a 62% correlation between the level of sentiment and the three-month change in real personal consumption expenditures.

The expectations component of consumer sentiment led the decline in the overall February index. The 12.6% month-to-month drop reversed all of the increases during the prior several months and the series landed at its lowest level since 1980.

Expectations for business conditions during the next year plunged 34.0% m/m to the lowest level since 1980. Expectations for conditions during the next five years also fell. The expected change in personal finances also fell back to the lowest level since last June with a sharp 9.6% decline.

The current economic conditions index fell 1.5% after the sharp 4.3% January decline. Buying conditions for large household goods were viewed as having improved very slightly but the index remained down 16.3% from a year earlier. The view of current personal finances fell sharply and the index remained down by nearly one-half from early 2007.

The opinion of government policy, which apparently influences economic expectations, improved to the highest level since last January. Fourteen percent of respondents thought that a good job was being done by government while a reduced forty-three percent thought that a poor job was being done.

Inflation expectations for the next year fell back to 2.3%. It was as high as 7.0% in May. The range of expectations is from slight price deflation to a 5.2% increase in prices, though that latter figure is half the year-ago expectation. The expected inflation rate during the next five years worked the other way and ticked up to 3.5%.

The University of Michigan survey data is not seasonally adjusted. The reading is based on telephone interviews with about 500 households at month-end; the mid-month results are based on about 300 interviews. The summary indexes are in Haver's USECON database with details in the proprietary UMSCA database.

Budget of the United States Government Fiscal Year 2010 The Budget Documents from the Office of Management and Budget can be found here.

The Shimer Puzzle and the Identification of Productivity Shocks from the Federal Reserve Board is available here.

Deflation strikes back -- Uh, oh… Japan’s prices are falling again. The chart of Japan’s Core CPI looks like the path of the ground hog on ground hog’s day. In this case it is not four more weeks of winter but another bout with deflation that is in prospect. Japan’s quantitative easing seemed to have been successful in dispatching Japan’s deflation as inflation began to rise in 2008. Then as oil prices plunged, as the yen soared and as financial crisis gripped the global economy, Japan’s recession took hold and now deflation is back. Just today Japan issued a report of a 10% Yr/yr drop in industrial production and with dwindling consumer spending. The downturn fuels the deflation and deflation fuels the downturn. Japan’s economy has been performing badly enough that the yen has reversed its course and is now depreciating. The near 50% drop in Japan’s exports yr/yr is a clear demonstration of how much the global economic downturn is battering Japan. But the re-emergence of Japan’s deflation is a bad sign and an event that will make Japan’s recovery that much more difficult.