Once again the time has come for the U.S. Bureau of Economic Analysis (BEA) to take its month-end look at the U.S. economy with its estimate of growth in Gross Domestic Product (GDP). GDP is an important number because it represents the value of all goods and services produced in the U.S. This month was the first estimate of growth during the final quarter of 2011. It came in at 2.8 percent – but GDP growth rates are always stated on an annualized basis (adjusted for inflation) so actual growth was one-quarter of this. It was the strongest growth in a year and a half – which isn’t saying much.
Growth for all of 2011 was 1.7 percent, less than half the 2010 rate. But consider what happened last year. The disaster in Japan disrupted supply chains and had an impact across the globe – including here in Columbus, where manufacturing and wholesale trade employment fell. The Arab Spring uprisings created jitters in oil markets and gasoline prices spiked. All this put consumers in a surly mood; the Thomson Reuters/University of Michigan Consumer Sentiment Index dropped in August to a level comparable to those at the depths of the recession. (The index has come back nicely from that low, however.)
The 2.8 percent rate was a touch less than the 3 to 3.25 percent that economists had expected, but this initial estimate is subject to changes that could easily raise it to that level. Consider that we in the economics community are telling the BEA, “We want you to figure out the total value of everything produced in the U.S.! And we want you to do it in a month!” The fact that they are able to come up with an estimate at all is really pretty amazing.
In any case, where growth was – and where it wasn’t – raise some concerns. It wasn’t in consumer spending, which accounts for 70 percent of the economy but contributed only half of the 2.8 percent total growth. And it certainly wasn’t in government expenditures, which actually subtracted nearly a percentage point. We imported more; imports are a subtraction from GDP (but do indicate that consumers and businesses are buying something).
As it turns out, nearly 2 percent of the 2.8 growth was due to businesses stockpiling inventories. We don’t know whether they are doing this on purpose because they expect sales to pick up and want to be ready or whether they did it by accident because they thought that holiday sales were going to be stronger than they were. But regardless, inventories rising now means that less production will be needed later to satisfy demand. So inventory accumulation adds to growth now but subtracts from growth later.
The economics community is not thrilled about growth prospects for 2012: GDP growth staying below 2.6 percent all year, and a 2.4 percent average for the year as a whole. (But see my earlier post about the inability of economic forecasts to predict anything over the past few years.) We need better than three percent consistently to make a real dent in unemployment.