Cold Weather Claims Another Victim: Fourth-Quarter GDP
The United States economy expanded at a much slower annual rate in the final months of last year than initially estimated. The downwardly revised estimate of GDP growth was a sign that moderate growth characterized the fourth-quarter of 2013, and reflected the frigid temperatures that engulfed much of the nation in recent months as well as softer foreign demand for American products. Consumer spending once again carried the U.S. economy, but the American consumer spent less than originally estimated last quarter as wage growth and job creation continued to be weak. While consumer spending has been resilient, the economic environment has been undeniably difficult.
In the fourth-quarter of 2013, everyday private-sector activity drove the economy forward despite the macro-level problems that were plaguing the United States. According to the government’s initial projection, a 3.3 percent increase in real personal consumption expenditures in the three-month period drove overall gross domestic product growth for the period; consumer spending — uninspired by any meaningful increase in income — offset a 12.6 percent decrease in government spending in to push annual gross domestic product growth to 3.2 percent for the period. But upon a second look, using “more complete source data” than was available when the advanced estimate was made earlier this year, government economists determined that consumer spending was not as strong in the fourth quarter as previously calculated, forcing a downward revision of fourth-quarter GDP.
According to the “second” estimate released by the Department of Commerce’s Bureau of Economic Analysis, real GDP — the output of goods and services produced by labor and property located in the United States — increased at an annual rate of 2.4 percent in the fourth-quarter of last year. That 0.8 percentage point drop is equivalent to $32.7 billion.
In the third-quarter, real GDP increased 4.1 percent. That acceleration and the strong initial read of fourth-quarter GDP gave analysts and economists alike reason to believe economic growth would strengthen, job creation would increase, and wages would improve in 2014. Still, “while 2.4 percent is fairly sluggish,” High Frequency Economics chief economist Jim O’Sullivan wrote in a research note obtained by Forbes, the growth came “despite more adverse than usual weather at the end of the quarter and the government shutdown at the start. The shutdown directly subtracted 0.3 points from the growth rate through the government spending component, but there were likely other effects as well.”
Exports, personal consumption expenditures, nonresidential fixed investment such as spending on factories, and private business inventory investment all contributed to fourth quarter GDP growth. Comparatively, government spending at all levels — federal, state, and local — as well as residential fixed investment, like spending on housing, made negative contributions to GDP growth. Meanwhile, imports, which count as a subtraction in the calculation of GDP, increased during the final three months of 2013.
But the strength and weaknesses of the U.S. economy in the fourth-quarter did not change much from the advanced GDP estimate and the revision. What changed was the magnitude of positive contributions; the downward revision reflected a deceleration in private inventory investment, and a larger decrease in federal government spending than previously estimated, as well as downturns in residential fixed investment and in government spending at the state and local level. Once again, consumer spending was an important pillar of economic growth, but the quarter’s increase in personal consumption expenditures was smaller than previously estimated. The 3.3 percent increase in personal consumption expenditures was lowered to a 2.6 percent gain. Cold weather weighed heavily on retail sales, home building and sales, hiring, and industrial production.
Even though the consumer spending metric was lowered, the fourth-quarter of 2013 still represented the strongest pace recorded since the first quarter of 2012 — an encouraging sign after retail sales recorded negative growth for the second consecutive month in January. While economists have begun to worry that more than inclimate weather has impacted consumer spending, Friday’s numbers showed that fourth-quarter economic growth depended heavily on the country’s consumers. Consumer spending, which accounts for more approximately 70 percent of U.S. economic activity, contributed 1.73 percentage points to GDP growth.
That fourth-quarter contribution came as the American consumer managed to spend more money without earning more money — or, at least, they spent money faster than they earned it. According to the U.S. Bureau of Economic Analysis, real disposable personal income — what people have left to spend after taxes and inflation, chained 2009 dollars, — declined by 0.2 percent in December. Meanwhile, personal consumption expenditures increased 0.2 percent on the same basis. Using current dollars, real disposable personal income was flat, and personal consumption expenditures increased 0.4 percent. At the the individual level, the net effect of this spending pattern was higher debt and smaller savings accounts.
While investments in housing were weak in the last quarter, business investments can be described as a bright point in the government’s data. With companies investing more in equipment and buildings, nonresidential fixed investment expanded 7.3 percent in the fourth-quarter, up from the advance estimate of 3.8 percent, and that jump is a indicator of future economic growth.
Economists had expected the Commerce Department to downwardly revise growth, and even Friday’s figure was only slightly lower than the 2.5 percent expansion expected by Wall Street, it was a significant enough decline to reignite concerns for job and wage growth this year. At 2.4 percent, the economy has turned back to its post-recession growth narrative, with GDP growth remaining stubbornly close to 2 percent. Other gauges of economic growth have flashed similar warnings in recent months; consumer spending, job creation, factory output and the housing market have all reflected weakness that economists fear may not be able to be completely explained by the colder-than-usual temperatures.
From 2012 levels, GDP increased 1.9 percent in 2013, which compares to an increase of 2.8 percent the year before. But it was important to note that growth averaged 3.25 percent in the second half of the year, compared to the 1.8 percent recorded in the first six months of 2013. Still, fewer fiscal hurdles and increasing rates of job creation are expected to accelerate economic growth in coming months, even if the first months of 2014 prove to be slow as expected due to poor weather. “You should see some pent-up activity show up in the second quarter of the year,” RBC Capital Markets senior economist Jacob Oubina told Bloomberg. For 2014, “it’s a less-headwinds story rather than fundamental improvement in the internals of the economy.”
The Federal Reserve has predicted the economy will expand at between a 2.8 percent and a 3.2 percent rate this year, with the unemployment rate falling to between 6.3 percent and 6.6 percent. Already this year, despite weaker-than-expected job creation numbers in January, the jobless rate has ticked down to 6.6 percent, and the drop was not due entirely to disheartened job seekers dropping out of the labor force like in previous months. Last month, the central bank noted that, “Economic activity picked up in recent quarters,” although the latest indicators suggested that growth may not be as robust as previously thought. Fed Chair Janet Yellen told lawmakers Thursday that the weather may be responsible for softer economic data, but “at this point, it is difficult to discern exactly how much.” Still, Fed policymakers agreed at a late January meeting to continue winding down the central bank’s monetary stimulus program.
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