Fourth quarter shows the end of cheap credit
The end of cheap credit in America finally begins to show its effects in the broadest of measures, gross domestic product.
The economy grew at only a 1.1 percent annual in the fourth quarter of last year, the slowest pace in three years, amid belt-tightening by consumers facing spiraling energy costs. . . .Three big changes from 2005:III to 2005:IV make up the slowdown. The one I least expected was government expenditures and investment which changed -2.4%. This is mostly due to a -13.1% change in defense spending, coming on the heels of a very big 2005:III increase. In the fourth quarter, defense spending actually dropped to its lowest real level in a year (since 2004:IV).
The Commerce Department report, released Friday offered the latest figures on gross domestic product, the best measure of the country's economic standing.
The 1.1 percent growth rate in the fourth quarter marked a considerable loss of momentum from the third quarter's brisk 4.1 percent pace. The fourth-quarter's performance was even weaker than many analysts were forecasting. Before the release of the report, they were predicting the GDP to clock in at a 2.8 percent pace.
The 1.1 percent growth rate was the smallest gain since the final quarter of 2002, when the economy expanded at just a 0.2 percent rate.
The second big contributor to the GDP slowdown was imports. Imports grew tremendously, almost four times faster than exports, and considering the US import bill is about 60% larger than our export tally, that makes for a big dent in GDP growth. Most of that big import bill was oil-related.
Which feeds into the third and largest contributor to the GDP slowdown: consumer spending. Overall real growth in personal consumption expenditures was a meager 1.1%, and real spending on durable goods tanked an incredible -17.5%. In fact, the durable goods tally in the fourth quarter was at its lowest since 2004:III.
Why the big cutback on spending? Obviously part of the answer is higher energy costs. But that is only part. The neglected side of the story is the American consumer's cutback in deficit spending. In the third quarter, the US personal savings rate was -1.8%, while in the fourth quarter Americans tried a little harder to live within their means, taking the personal savings rate to -0.4%. That cutback in spending on credit meant less spending on big-ticket items that need credit -- you guessed it, durable goods and especially the motor vechicles and parts subcategory which saw real spending in 2004:IV drop to its lowest point in over four years.
The US economy is profoundly dependent on consumer spending growth for its overall health. Note that of the seventeen full economic quarters since 9/11 (i.e. 2001:IV to 2005:IV), 15 of 17 have seen personal consumption expenditures make up over 70% of US GDP. Before 9/11 the US never had a quarter in which PCE was over 70%. Never. Yet now it is routine.
If you're a regular reader of General Glut's Globblog, you know that in 2005 all this consumption was fueled by debt. For the first time since the depth of the Great Depression, the US racked up a negative personal savings rate, and this consumption in excess of income was essential in keeping the US economy from actual contraction in the third quarter. The real growth rate of the US economy from 2004 to 2005 was 3.5%. However, of the $375.4bn in real growth (in constant 2000 dollars), $191.4bn (in constant 2000 dollars, deflated by the PCE price index) was in personal consumption expenditures over and above income -- i.e. negative personal savings. Without that extra credit-injected economic fuel, the real GDP growth rate for 2005 would have been a paltry 1.7%. That would put the US economy right back where it was in 2002.
Private job growth (of actual non-seasonally adjusted jobs) in 2005:IV was only +303,000 compared to 2004:IV's +508,000. Private sector year-over-year job growth by month hasn't been over 2 million since September (from July 1993 to September 2000 the monthly figure dropped below 2 million only for only one three-month stretch). Real average hourly earnings of production workers (i.e. the 80% of us who have a boss) have been sliding for two years.
No wonder Main Street isn't feeling the love this winter.