The Independent Market Observer

Fourth-Quarter GDP Isn’t as Bad as It Looks

Posted by Brad McMillan, CFA®, CFP®

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This entry was posted on Jan 30, 2015 11:50:00 AM

and tagged In the News

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Ifourth-quarter gdpn light of this morning’s somewhat disappointing U.S. growth number—2.6 percent for the fourth quarter of last year—I expect we’re in for another round of economic doomsaying. Before we get too upset, though, it’s worth looking at the fourth-quarter GDP number in a bit more depth.

The rest of the story

Certainly, economic growth of 2.6 percent falls below the expected 3-percent level, and well below the 5-percent growth of the previous quarter. But it’s important to understand where those numbers come from.

According to Capital Economics, one of the major components of the third quarter’s 5-percent growth was a surge in defense spending, which, at the time, looked a bit questionable. Sure enough, defense spending partially reversed in the last quarter. With that effect removed, the two quarters would have shown growth rates of 4.3 percent and 3.2 percent, respectively, which is both more reasonable and much less worrying.

The other factor that slowed growth in the last quarter was a much greater increase in imports than in exports, a result of strong domestic demand by consumers and a strong dollar. Both of these demonstrate the strength of the recovery, even as they slowed growth.

Much of the growth in the fourth quarter, in fact, was driven by consumer spending, which increased at a rate of 4.3 percent. Representing more than two-thirds of the economy, consumer spending growth plays a major role in how fast the economy grows, and this is a good sign for 2015.

Verdict: Growth has slowed a bit, but not nearly as much as today's number suggests. Although there are soft spots in the economy, we have nothing to worry about at this point.

If you want to see an economy in trouble, look at the news

There have been plenty of headlines recently that underscore how far away the U.S. economy is from a meltdown.

Greece, of course, is the poster child here, and the differences between it and the U.S. are legion. Most significant, Greece is a small, open economy that depends on imports and does not control its own currency. The U.S. is a large, closed economy whose growth largely depends on internal factors. It also controls its own currency, so it never needs to default on its debt.

The other country floundering economically is Venezuela. Again, it’s a small, open economy dependent on a single sector—in this case, oil exports. You could make essentially the same argument for Russia.

A final characteristic failed economies share is that they are largely controlled by the state. Rather than let the markets provide signals about real needs and problems in the economy, the governments cover up those signals until something breaks. The U.S., for all its political problems, doesn’t cover up issues; instead, we argue about them at top volume.

No sign of failure here

Looking at these struggling economies, we see that the U.S. has little in common with them and shows no sign of impending failure. In fact, we’re in a significantly better position than most other countries, no matter which metric you use. In the unlikely event the U.S. economy fails, it would be the last to go, not the first.

                                     

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