Fourth Quarter GDP Revision Shows U.S. Economy Continues Sub-Par Recovery



The United States economy expanded at a much slower annual rate in the final months of last year than initially estimated. In January, the Department of Commerce calculated that gross domestic product — the broadest measure of economic activity —expanded at a 3.2 percent annualized rate, with a significant increase in real personal consumption expenditures  driving the growth. 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 to 2.4 percent.

Now, according to the Commerce Department’s third and final estimate of fourth-quarter growth, GDP — the output of goods and services produced by labor and property located in the United States — expanded at a 2.6 percent annual rate in the final three months of 2013. Still, the general picture of economic growth remains largely the same.

Consumer spending has been key in all three of the Commerce Department’s adjustments of fourth-quarter GDP. 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. A 3.3 percent increase in real personal consumption expenditures in the three-month period drove overall gross domestic product growth for the period, and consumer spending — uninspired by any meaningful increase in income — offset a 12.8 percent decrease in government spending. That consumer spending improved from the third quarter’s 2 percent rate of growth was good news for an economy dealing with decreasing government spending, a softening housing recovery, and months of worse-than-usual winter weather. In fact, consumer spending climbed by the most in three years.

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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 — 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.

Meanwhile, after-tax corporate profits, excluding inventory valuation and capital consumption adjustments, slow from the third quarter’s 2.6 percent rate of growth to 1.9 percent, indicating companies could be more hesitant to add workers and increase investments in the coming months.

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 first revision. What changed was the magnitude of positive and negative contributions; the upward revision primarily reflected an acceleration in personal consumption expenditures and exports. Once again, consumer spending was an important pillar of economic growth, especially as the quarter’s increase in personal consumption expenditures was greater than previously estimated. The 3.3 percent increase in personal consumption expenditures was lifted from a 2.6 percent gain.

Exports, personal consumption expenditures, and nonresidential fixed investment such as spending on factories, all contributed to fourth quarter GDP growth. Comparatively government spending at levels — federal, state, and local — as well as residential fixed investment, like spending on home construction, made negative contributions to GDP growth. Plus, imports, which count as a subtraction in the calculation of GDP, increased during the final three months of 2013. The deceleration in GDP growth from the third quarter reflected a downturn in private inventory investment, a larger decrease in federal government spending, and downward revision of nonresidential investment from 7.3 percent to 5.7 percent growth.

While the upward revision fell just short of economists expectations for an expansion of 2.7 percent, it showed that the U.S. economy had momentum heading into January’s harsh weather. The extremely frigid temperatures much of the United States experienced in the first months of the year caused U.S. manufacturing output to record its biggest decrease in more than four and a half years in January; kept job creation weak in December and January; contributed to a slowing in consumer spending over the past two months; and, impacted residential construction, with January housing starts dropping to the lowest levels experienced in almost three years. The Commerce Department’s downward revision of GDP growth in February was a significant enough decline to reignite concerns for job and wage growth this year, and the obvious impact weather had on economic activity only further fueled concerns.

But “the economy is shaking off the negative impacts from the weather,” Wells Fargo Securities senior economist Sam Bullard told Bloomberg. “We’re beginning to see signs that growth is going to gain some traction and strengthen and accelerate as the year progresses.” Such signs have been forthcoming; in February, the Commerce Department’s retails sales report revealed that for the first time in three months retail sales increased on a month-over-month basis, rather than decreasing. The retail sales growth reflected a comparable pickup in consumer spending, a measure that accounts for approximately 70 percent of gross domestic product in the United States. That same month, the Department of Labor announce that the U.S. employers added 175,000 jobs to payrolls last month — a pace far surpassing both December and January. It also showed that average wages increased, rising 9 cents to $24.31 an hour in February. And, both the employment and wage gains put consumers in a better position to increase outlays.

Still, in addition to the cold temperatures and snowy weather, the continuing high levels of long-term unemployment have weighed on the economy thus far in 2014. In particular, late December’s expiration of emergency unemployment aid for 1.3 million out-of-work Americans likely has contributed to a slowdown in spending.

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.

From 2012 levels, GDP increased 2.6 percent in 2013, which compares to an increase of 2.0 percent the year before. But it was important to note that growth averaged 3.35 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 are slow as they are expected to be because of the 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 after last month’s GDP update. 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 3.0 percent rate this year, with the unemployment rate falling to between 6.1 percent and 6.3 percent. Already this year, despite weaker-than-expected job creation numbers in January, the jobless rate has ticked to to 6.7 percent, and the drop was not due entirely to dishearted job seekers dropping out of the labor force like in recent months. At this month’s meeting of the Federal Open Market Committee, policy makers continued to unwind the central bank’s extraordinary economic stimulus program. Yet — even though the fate of joblessness has fallen extremely close to the Fed’s targeted rate of 6.5 percent, Chair Janet Yellen thinks the economy is still far too weak to increase the federal fund rate.

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