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GDP Up 2.8% in Q4 2011

The gross domestic product increased by 2.8% in the last quarter of 2011 boosted by sales of cars but hampered by austerity in government purchases over the final three months.

The full year growth was only 1.7%, which as a release from the Economic Policy Institute says,”would not generate reliable declines in unemployment should it continue.” In fact, even the 2.8% growth number, while subject to revision, was below expectations from economic analysts.

And I’m interested in the fact that government purchases took away from growth. The quarterly numbers are often screwy when it comes to that – when the purchases get recorded could account for massive growth or massive pullbacks, and it smooths out over time. But there’s no question that fiscal policy has been contracting through 2011, not just through policy changes from this Republican House, but also because the stimulus package of 2009 has waned. And more withdrawals of fiscal support will hit at the end of February if the payroll tax cut and unemployment benefits aren’t extended. Even then that just maintains current law. And you have to add in state and local cutbacks. Contrary to some beliefs that Jack Lew “snookered” Republicans and didn’t reduce spending, government spending is a fiscal drag right now.

Fortunately, there was some growth despite public sector contraction. Auto sales in particular added 3 percentage points to GDP, which is interesting considering the fury with which Republicans still bash the successful domestic auto rescue.

Dean Baker writes (via email) that most of the growth came from inventories, which is troubling going forward.

A sharp reversal from the third quarter’s decline in inventories added 1.94 percentage points to GDP growth in the fourth quarter, bringing the rate to 2.8 percent. Final demand grew at just a 0.8 percent rate in the quarter, a sharp drop from the 3.2 rate of the third quarter, as a 4.6 percent drop in government spending lopped almost a full percentage point off growth in the quarter.

Trade subtracted 0.11 pp from growth, with a 4.4 percent rise in imports outweighing the impact of a 4.7 percent increase in exports, since the former is a much larger share of GDP. Given the sharp buildup in inventories, it is surprising that imports did not rise more, although both numbers will be subject to substantial revisions since the December data in both cases is simply imputed in this release.

There is not much prospect for a substantial pickup in the immediate future. Car buying will not continue to grow at such an extraordinary pace, although the decline in the housing and utility category will also not be repeated. However, with the saving rate already down to 3.7 percent, it is unlikely that consumption will outpace income growth in the quarters ahead, meaning that real consumption growth is likely to be near 2.0 percent. Equipment and software spending will continue to grow in a 8-10 percent range, with both residential and non-residential structures showing modest growth. With government spending still slowing growth by 0.2-04 pp, growth is likely to remain below 3.0 percent through 2012.

And of course, that’s not good enough to create jobs. We need catch-up growth, which would traditionally be above that 3% line. If the inventory boom was a mirage and sales do not rise to match it, we could be looking at a stagnant first quarter, and beyond.

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David Dayen

David Dayen