The BEA has just released its first estimate of economic growth for the fourth quarter of 2005. It was dramatically lower than most people were predicting. The consensus estimate was for about 3.5% growth. Some pessimists guessed that it would be as low as 2.5%. The actual figured turned out to be just 1.1%. From today’s BEA news release:
Real gross domestic product — the output of goods and services produced by labor and property located in the United States — increased at an annual rate of 1.1 percent in the fourth quarter of 2005, according to advance estimates released by the Bureau of Economic Analysis. In the third quarter, real GDP increased 4.1 percent.
…The deceleration in real GDP growth in the fourth quarter primarily reflected a deceleration in [personal consumption], an acceleration in imports, a downturn in federal government spending, and decelerations in equipment and software and in residential fixed investment that were partly offset by an upturn in private inventory investment.
This is a terrible report. Consumer spending slowed dramatically, to its lowest rate of growth in recent history. Business spending slowed even more dramatically, from a growth rate in the neighborhood of 8-10% over the past 10 quarters to just 3% this quarter – the lowest rate of business spending growth since 2003:Q1.
In fact, the only thing that kept GDP growth positive at all was a massive build-up in inventories – the largest increase in inventories since early 2002. Apparently businesses were caught off guard by the slowdown in demand, and have not yet slowed their production accordingly. Presumably, they will.
All in all, this is an extremely worrying report. I’ve been bearish about economic growth in 2006 for a little while now, and this has just confirmed my worst fears.