January 30, 2008 (GDP Byte)
by Dean Baker
"Non-residential construction has risen by 30.2 percent in the last two years."
GDP eked out a 0.6 percent gain in the fourth quarter driven primarily by a 2.0 percent increase in consumption for the quarter. Non-residential structures, net exports, and state and local government spending each added close to a half percentage point to growth while housing and inventories were both major drags on growth.
The growth in consumption was impressive given the quarter’s weak job growth, declining real wages and plunging house prices. The savings rate fell to just 0.2 percent for the quarter, bringing the rate for the year to 0.5 percent, almost identical to the rates for 2005 and 2006. Within consumption, durable goods showed the strongest gains, rising at a 4.2 percent rate. This in turn was driven by an 8.0 percent growth rate in the category of “furniture and household equipment.” This is most likely explained by a surge in purchases of appliances like flat screen televisions, since the plunge in home sales is depressing the sale of furniture. Much of this increase reflects declining prices. The nominal growth rate in this category was just 1.8 percent.
Other consumption spending grew slowly, with spending in non-durables rising at a 1.9 percent rate and services at a 1.6 percent rate. Excluding rent and medical care, spending on services declined in the quarter.
Non-residential structures rose at a 15.8 percent annual rate, adding 0.52 pp to the growth rate. This sector has exploded in the last two years, growing by 30.2 percent since the fourth quarter of 2005. With vacancy rates rising for office space and retail space, it is likely that this boom is ending and we may see a contraction in this sector in future quarters.
Net exports added 0.41 pp to growth, driven primarily by the slow growth in imports, which rose at just a 0.3 percent rate for the quarter. The effect of the falling dollar is showing up clearly in prices on both sides. Export prices rose at a 6.1 percent rate in the quarter, while import prices rose by 12.7 percent. Oil is an important factor in rising import prices, but the increase is across the board. The price of imported services rose at an 8.8 percent rate in the quarter.
State and local spending rose at a 4.0 percent rate in the fourth quarter adding 0.49 pp to growth. This rate will slow sharply in future quarters and may turn negative. Many state and local governments are already reporting budget deficits due to declining property taxes and other housing related revenue. It is also worth noting that these governments have seen sharply rising prices, with the price index for this sector rising at a 7.2 percent rate for the quarter and 6.2 percent over the last year.
Housing fell at a 23.9 percent annual rate. This rate of decline is certain to slow, but the sector may shrink further at least through the first two quarters. Housing knocked 1.18 pp off GDP growth in the quarter, with slower inventory accumulations reducing growth by 1.25 pp.
The GDP price index rose at a 2.6 percent rate, with the core index rising at a 2.4 percent rate. The core consumption index rose at a 2.7 percent rate. There is likely to be upward pressure on inflation in future quarters due to rising import prices. The GDP data imply that productivity growth was near zero for the quarter, so the third quarter jump was apparently a fluke. The evidence continues to suggest that we are on a slower productivity growth track.
Housing is likely to be less of drag on GDP in future quarters, but this will be largely offset by the fact that non-residential construction and state and local spending will provide less of a boost. Net exports are likely to continue to be a positive, albeit at a cost of higher inflation. Whether or not the economy can remain on a positive growth track will depend on the course of consumption growth. With many homeowners now having zero equity and hitting ceilings on credit cards, it is difficult to see how consumption growth can be sustained.
Dean Baker is the Co-director of the Center for Economic and Policy Research. CEPR’s GDP Byte is published quarterly upon release of the Bureau of Economic Analysis' report on the Gross Domestic Product.