Is the Recovery Fading Already?

The BEA just released their first estimate of economic activity in the fourth quarter of 2003 (October through December). The overall number for GDP growth is a solid 4.0% annual rate. However, that is below what many economists had been expecting.

One part of the report that’s discouraging is that it looks like the boom in spending by businesses (also known as investment spending) during the summer of 2003 may already be running out of steam. While the Q4 figure on nonresidential investment spending was a respectable 6.9%, that’s actually pretty low for the period immediately after a recession. In the year after the 1974-75 recession, nonresidential investment grew by 9.6%. The year after the 1981-82 recession, it grew by 20.5%. The year after the 1991-92 recession, it grew by 9.7%. In all of 2003 it grew by just 5.6%, and growth now seems to be slowing. The graph below illustrates the possible waning of the 2003 boom. The blue line is spending by individuals, the green line is construction activity on housing, and the red line is spending by businesses. All three have faded from their summer highs.

The second part of the report that doesn’t bode well is disposable personal income. The after-tax income of individuals grew by just 0.1% in the fourth quarter – the lowest rate of personal income growth since the depths of the recession in 2001. If income isn’t growing, it’s hard to see how consumption can continue to grow. Of course, the explanation for the lack of income growth is easy to understand — few new jobs are being created, so income isn’t growing.

It’s certainly too soon to call the recovery over – this quarter’s numbers will be revised, and they could just be a 1-quarter aberration. But I fear that it suggests that my stated pessimism about the recovery may be justified.