January 28, 2005 (GDP Byte)
GDP Growth Slows in Fourth Quarter
January 28, 2005
By Dean Baker
GDP grew at a 3.1 percent annual rate in the 4th quarter, nearly a full percentage point below the 3rd quarter growth rate. The falloff in final sales, which excludes inventory accumulations, was even sharper, dropping from 5.0 percent in the 3rd quarter to just 2.7 percent in the 4th quarter.
Consumption growth continues to be by far the dominant force propelling GDP growth, rising at a 4.6 percent annual rate. This increase accounted for more than the full increase in GDP in the quarter. Within consumption, the food component showed an extraordinary gain, rising at a 6.9 percent annual rate and accounting for 21.6 percent of GDP growth in the quarter.
Investment showed a mixed picture, with equipment and software investment rising at a healthy 14.9 percent annual rate, while investment in structures dropped by 4.1 percent, the second consecutive decline. Equipment investment was likely spurred in part by the ending of the accelerated depreciation rules that were put in place in the 2002 tax cut. This is consistent with a 76.9 percent jump in computer sales and a 28.0 percent rise in motor vehicle production. Without these increases, GDP growth would have been just 2.0 percent in the quarter.
The foreign sector was a huge drag on growth in the quarter, knocking 1.7 percentage points off the growth rate. Exports fell at a 6.9 percent annual rate, while imports rose at a 9.1 percent rate. The trade deficit for the quarter hit $687.5 billion or 5.7 percent of GDP, or 8.2 percent of consumption. (It is reasonable to compare the trade deficit to consumption, since presumably the imbalance will eventually be corrected primarily through reduced consumption spending, rather than lower investment or government spending on defense and education.) By comparison, the peak deficit in the eighties was just 3.1 percent of GDP.
It is remarkable that there still is very little visible response to the decline in the dollar over the last two years. The most likely reason that the drop in the dollar has had little effect to date is that importers have largely absorbed the impact in the form of lower profit margins. Until import prices rise more, the trade deficit will remain at these levels, and possibly even get larger.
The prospect of higher import prices is not the only reason in this report for anticipating higher inflation. This report provides more evidence that productivity growth may be slowing. Output in the non-farm business sector grew at just a 2.8 percent annual rate. Given the 2.0 percent growth in hours for the quarter, this implies productivity growth for the quarter of less than 1.0 percent. Following last quarter's relatively weak 1.8 percent rate of productivity growth, we may be seeing a falloff from the extraordinary pace of productivity growth over the prior three years. If this productivity slowdown proves to be real, then somewhat higher inflation is virtually inevitable.
Perhaps the most striking item in this report was an unprecedented jump in dividend payouts. Dividend income rose by $110.1 billion for the quarter, an incredible 153.1 percent annual growth rate. Presumably, this jump was driven by some unusual one-time payouts, but clearly dividend payout rates are on an upward path, even if much of this jump is reversed next quarter. While a higher rate of dividend payouts was clearly a goal of the recent dividend tax cut, it is worth noting that it could lead to even lower national saving. Even with this surge in dividends, the savings rate for the quarter out of disposable income was just 1.3 percent. If the dividend payments are instead retained by firms, all of this income is saved.
This report should raise concerns about the strength of the economy going forward and the prospects for inflation. With higher import prices a virtual certainty (the alternative is absurdly large trade deficits) and productivity growth likely decelerating, there will be considerable upward cost pressure. This will be amplified once labor markets tighten enough to allow real wages to rise again.
Dean Baker is Co-Director of the Center for Economic and Policy Research in Washington, D.C.
CEPR’s GDP Byte is published quarterly upon release of the Bureau of Economic Analysis' report on the Gross Domestic Product.