January 30, 2009 (GDP Byte)
Plunging Car Sales Lead Fourth Quarter GDP Drop
By Dean Baker
January 30, 2009
Final demand fell at a 5.1 percent annual rate.
GDP shrank at a 3.8 percent annual rate in the 4th quarter, the sharpest decline since a 6.4 percent drop in the first quarter of 1982. Motor vehicle production was the biggest factor in the decline. It dropped at a 63.4 percent annual rate, knocking two full percentage points off the growth rate. However, most other sectors also showed declines in the quarter. The rate of decline in other sectors is likely to accelerate in the absence of effective stimulus. Inventory accumulations added1.32 percentage points to growth in the quarter, with final demand falling at a 5.1 percent annual rate. These accumulations are involuntary – the result of slower than expected sales – and they imply further cutbacks in production in future quarters.
Consumption overall fell at 3.5 percent annual rate in the quarter. Durable goods consumption, driven by declining car purchases, fell at a 22.4 percent rate, but non-durable goods fell at an extraordinary 7.1 percent rate. Consumption of services rose at a modest 1.7 percent annual rate, although more than half of this increase was attributable to a weather-induced increase in the use of electricity and gas. Consumption will continue to fall sharply as incomes decline due to job loss and the saving rate returns to pre-bubble levels. The saving rate for the third quarter was 2.9 percent. Prior to the decline induced by the stock and housing bubbles, it had averaged close to 8.0 percent of disposable income.
One area that raises serious concerns about the steepness of the downturn is the 27.8 percent rate of decline in investment in equipment and software. This is the sharpest drop since a 36.4 percent rate of decline in the first quarter of 1958. Demand in this sector had held up reasonably well, but now appears to be falling sharply. Moreover, the drop is hitting every component of equipment investment. Investment in information processing equipment and software, which accounts for more than half of the larger category, fell at an 18.9 percent rate in the quarter. Investment in structures fell at a modest 1.8 percent rate, but this decline is certain to accelerate as more projects reach completion.
Housing fell at a 23.8 percent rate, subtracting 0.85 percentage points from GDP growth. Housing now accounts for just 3.1 percent of GDP, down from 6.2 percent at its peak in 2005. The sharp decline in housing starts and new home sales for December indicate that there will still be further declines in this sector.
Imports and exports both plunged in the quarter, falling at 15.7 percent and 19.7 percent annual rates, respectively. In spite of the sharper rate of decline in exports, due to the much greater volume of imports, the trade sector was still a modest positive, adding 0.09 percentage points to GDP. Declines in trade are likely to continue, producing little net impact on GDP. By contrast, trade had added an average of 1.25 percentage points to GDP growth between the first quarter of 2007 and second quarter of 2008.
The government sector was still a positive factor due to a 5.8 percent increase in federal spending, which more than offset a 0.5 percent rate of decline in state and local spending. In the absence of stimulus, both of these numbers will move downward sharply. Federal spending was goosed prior to the election and state and local spending will be cut in response to budget squeezes.
While the headline number in this report is somewhat better than many analysts had predicted, this should provide little comfort. The build-up of inventories in the quarter will not continue long into this year. It implies further cutbacks in production in future quarters. Furthermore, it is virtually certain that the rate of decline in almost every sector will accelerate in the absence of a serious stimulus. The state and local government sector is especially vulnerable given the huge budget deficits showing up around the country. Further job cuts and the desire to increase savings will cause further sharp declines in consumption. Additionally, non-residential construction is likely to fall sharply as projects are completed with no new projects being started.
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.