A Weak Fourth Quarter

The Bureau of Economic Analysis released its Preliminary Report for the Fourth Quarter of 2006:

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 2.2 percent in the fourth quarter of 2006, according to preliminary estimates released by the Bureau of Economic Analysis. In the third quarter, real GDP increased 2.0 percent. The GDP estimates released today are based on more complete source data than were available for the advance estimates issued last month. In the advance estimates, the increase in real GDP was 3.5 percent … The increase in real GDP in the fourth quarter primarily reflected positive contributions from personal consumption expenditures (PCE), exports, state and local government spending, and federal government spending that were partly offset by negative contributions from private inventory investment and residential fixed investment. Imports, which are a subtraction in the calculation of GDP, decreased.

The annualized growth rate for investment demand was negative 15.6% with the decline in residential investment leading the way. Consumption growth was reported at 4.2% and the growth rate for government purchases was reported at 3.3%. So with consumption and government purchases growing faster than real GDP, classical economists can talk about reduced national savings – while Keynesians might note that this reduced national savings kept things from getting worse.

Jeannine Aversa writes:

The economy grew at a sluggish 2.2 percent pace in the final quarter of last year, much slower than initially estimated, the government reported Wednesday in the sort of unusually large revision that has happened only seven times in the last 30 years. The latest reading on the gross domestic product released by by the Commerce Department came a day after stocks on Wall Street and around the globe took a nosedive and showed the economy in a considerably weaker state than the government first estimated. It had initially reported the expansion in the last three months of 2006 to be at a 3.5 percent pace. The principal reason for the new, significantly lower estimate: Businesses tightened their belts amid fallout from the troubled housing and automative sectors.

Jeannine found one optimistic economist:

Ken Mayland, president of ClearView Economics likened the fourth-quarter’s showing as part of a “mid-course breather” reflecting a period of temporary listlessness, not a slide toward recession. “I think it is unfolding as a slowdown, not a turndown – meaning recession,” he said.

Let’s hope Ken Mayland is correct but just in case – I’m jumping on the bandwagon calling for the Federal Reserve to lower interest rates.

Update: James Pethokoukis has lately been emailing his pieces to economist bloggers. I usually just ignore them, but today’s is timely if not misguided

Does Wall Street’s swoon mean there’s a recession on the way? I think JPMorgan economist Jim Glassman summed up the current situation pretty well to me late yesterday: “The question is, does a recession seem a plausible scenario in the current circumstances … with inflation near post-World War II lows, corporate profit margins at record highs, an unprecedented global awakening underway, financial signals [credit spreads] still at good-time lows? Please!”

Why Pethokoukis would turn to James “DOW 36000” Glassman is beyond me – but he does acknowledge the news from the BEA. Pethokoukis goes onto to say:

The GDP report wasn’t all bad. Although everyone has been worried about the consumer–because of the housing slowdown and the subprime mortgage market meltdown–the GDP report showed personal consumption expenditures contributing 2.9 percentage points to the GDP growth rate. Overall, consumer spending–taking into account rising prices–increased 4.2 percent in the fourth quarter

Everyone has been worried that consumption demand would turn weak? I guess Pethokoukis doesn’t read our blog very much! Pethokoukis also goes onto to talk about the allegedly strong job market (don’t get me started as I have more to say on Friday), the allegedly exploding tax revenues, and strong corporate profits. Alas, the news from BEA today was that investment demand had declined – in spite of all those profits. At one point, Pethokoukis noted:

Yet one would have to be Dr. Pangloss to not somewhat fretfully wonder what the future holds given the stock market’s big plunge

Fine, I have neither Pangloss’s baseless optimism nor a single focus on the stock market. But maybe Pethokoukis should change his first name from James to Pollyanna.

Update II: Thanks to the AB reader for letting me know that I made a big mistake. James E. Glassman is managing director and senior policy strategist with J.P. Morgan Securities Inc. and is not the same person as James K. Glassman.