It certainly is easy to understand why the White House fixed on the good news in the fourth quarter’s report on the gross domestic product (GDP). It is harder to see why so many in the media seemed to go along, for this report said very little good about the economic situation. There were bright spots. One was the annualized 6.9% growth in the overall real GDP for the quarter. But one did not have to look too far beyond what is usually called the headline figure to find considerable cause for concern.
What created smiles was how that overall real GDP growth figure ticked up so smartly from the Omicron-depressed 2.3% annual growth rate of the summer quarter. It seemed to describe a return to the powerful and broad-based real growth of 6.5% averaged earlier in the year. But that enthusiasm was misplaced.
What made the quarter look so good had nothing to do with sales to consumers or businesses or homebuyers or even governments. The bulk of the growth came almost entirely from inventory restocking by retailers and wholesalers. According to the Commerce Department’s Bureau of Economic Analysis, business added some $224.7 billion to these stocks in the fourth quarter. That is a huge change from the average $60.2 depletion that occurred during the prior three quarters and at least twice the size of any historic accumulation. Were it not for this surge, annualized real GDP growth for the quarter would have been closer to a 2.0%, actually lower than in the third quarter and certainly slower than the rapid growth averaged during 2021’s first half.
The inventory restocking offers one welcome sign — that perhaps supply-chain shortages are abating. Surges in imports and exports recorded in the Commerce Department’s report do the same. But looking forward, this kind of inventory rebuilding or the import-export surge is not likely to be repeated. On the contrary, without an urgent need to catch up from supply interruptions, the growth of both exports and imports will almost certainly slow. And if history is any guide, retailers and wholesalers are likely to draw down these stocks of inventory to meet future sales.
Otherwise, the line items of final sales in the report all look weak. Real consumer outlays during the fourth quarter expanded at a 3.3% annual rate, up from the third quarter’s 2.0% rate of expansion but well below the robust 11.7% rate averaged during the first half of the year. Business spending on new productive facilities and equipment expanded at a meagre 2.0% annual rate during the fourth quarter, up slightly from the third quarter’s 1.7% rate but far below the 11% annual rate of expansion averaged during the first half of 2021. One could derive some satisfaction from the 10.6% expansion in business purchases of technology, what the Commerce Department calls “intellectual property,” but that is still a significant slowdown from the 14% rate of expansion in this area averaged earlier in the year. Even government spending, after a surge earlier in the year, declined outright during the fourth quarter, 4.0% at the federal level and 2.2% at the state and local level.
Nor was there good news on the big question of the day: inflation. The GDP deflator – the Commerce Department’s inflation measure – rose at a 6.9% annual rate during the fourth quarter, up from 6.0% rate during the summer quarter and considerably above the 4.3% of the first quarter or the 2.0% rate recorded for all of 2020. What is most discouraging is that the surge occurred across a broad front: 6.5% in the consumer sector, compared with 3.8% in the first quarter and 7.5% for productive equipment and systems, compared to 1.0% in the first quarter. Even government suffered an inflationary surge. The federal sector saw a 5.3% annualized rise in prices, compared with 4.0% in the first quarter. State and local government saw 8.8% inflation during the fourth quarter, compared to 6.3% during the first quarter. If this were not discouraging enough, it is worth noting that these deflators tend to follow a more muted path than the more popularly recognized consumer price index.
If the headlines seemed to encourage, the detail make two unwelcome conclusions clear: the post-pandemic recovery seems to be losing momentum, more precipitously than most anyone expected, and the inflation of which so many are beginning to worry seems more entrenched than ever. Things could turn around — on both counts — but what the nation has now is neither encouraging nor welcome.
The Economy's Got Plenty Of Trouble - Forbes
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