January 27, 2006
It’s Not Just Autos: GDP Numbers Show Weakness in Most Sectors
The Commerce Department reported today that real gross domestic product (GDP) grew in the fourth quarter of 2005 at the slowest rate in three years—1.1%, which is down from 4.1% growth in the third quarter. While plunging automobile sales played the greatest role in this slowdown (knocking 2.1% off of the growth number), weakness was seen across the board as personal consumption expenditures, investment in equipment and software, residential investment, net exports, and government purchases all slowed relative to third-quarter growth rates.
A striking finding is that final sales of domestic output (GDP minus inventory change) actually shrank in the fourth quarter, falling by 0.3%. This reflects both weakness in domestic demand and a sharp rise in the trade deficit (which knocked off 1.2% from GDP this quarter). The 1.45 point contribution from inventory buildup will dampen future GDP growth.
Equipment and software investment grew at the slowest rate since the first quarter of 2003, and residential investment growth was the lowest in a year.
While the negative automobile contribution to growth is the number most people will notice about this report, the GDP numbers released today show across the board weakness, with every major sector except inventory accumulation slowing relative to the third quarter.
The 0.8% growth in domestic demand (final sales to domestic purchasers, including net imports) was the lowest rate since the first quarter of 2002. A large part of this weakness can be explained by the continuing sluggish pace of real wage and salary income growth, which edged up only 0.4% this quarter. Since the last business cycle peak, real wage and salary income has risen only 5.5%, compared to a historical average of 17%. Even the jobless recovery of the early 1990s saw real wage and salary growth of over 8% by this point in the recovery. While consumers have offset some of this wage and salary weakness with home equity cash outs (and negative saving rates), all signs point to this dynamic ending. In short, what this economy needs, and soon, is strong real wage and salary growth to finance consumption going forward.
The trade deficit subtracted from growth for the 10th straight year, while exports grew at only 2.4% in the last half of the year. It would be easier for the U.S. economy to navigate out of the current soft patch with better net export performance.
Lastly, this report provides a solid argument against the Federal Reserve continuing to further raise interest rates next week. Core inflation (inflation in market-based personal consumption expenditures minus food and energy prices) remained at 1.8% for the quarter and 1.7% for the year. This tame inflation, combined with substantial weakness in the broader economy, argues strongly for the Fed to stop its campaign of interest rate hikes.
By EPI economist L. Josh Bivens
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