Last week provided several major shapshots of the economy. The good news is that the economy ended last year on a strong note. The not-so-good news is that early indications suggest that the pace of growth may be slowing.
Last Wednesday, the Commerce Department reported that the economy increased at a 3.5 annual rate in the 4th quarter. This is significantly faster than the pace during the prior two quarters. For the year overall, the economy increased by 3.4 percent (I’m glad to point out that this is nearly the same as the NAM’s January 2006 forecast of 3.3% growth for 2006 — NAM bases its forecast on Economy.com’s macromodel).
What is noteworthy about the 4th quarter performance is that the economy achieved such a solid pace despite the continued downturn in housing and a slowdown in business investment.
Down for a fifth-consecutive quarter, residential investment fell by 19 percent in the fourth quarter, the biggest decline since the early 1990s. Also, breaking a streak of 14 consecutive quarterly increases, business investment edged down 0.4 percent in the fourth quarter. This was and was mainly caused by a 12 percent decline in transportation products. New emission standards set to go into effect this year had previously caused a surge in spending on transportation products before the new regulations go into effect. As a result, a short-term correction, which may last several quarters, is taking place in business investment in transportation products.
Aided by lower energy prices as well as strong growth in real wages, consumer spending increased a robust 4.4 percent in the fourth quarter, the fastest pace in three quarters. At the same time, double-digit export growth coupled with the first decline in imports since the first quarter of 2003 resulted in trade (exports-imports) accounting for 1.64 percentage points to overall GDP growth in the fourth quarter — the largest contribution to growth from trade in a decade!
The surge in exports came from well-balanced double-digit increases in sales abroad of industrial supplies, capital goods and consumer goods. The decline in imports was due to slowdowns in industrial supplies and capital goods, mainly caused by the slowdown in business equipment spending here at home. Based on this report (which also showed modest inflation growth, the Federal Reserve chose to keep interest rates at current levels).
On Friday, the Labor Department reported that the that the economy created 111,000 jobs in January, a sharp deceleration from the 206,000 increase in December. This suggests that the economy may be beginning to cool. However, one month of sluggish job growth does not make a trend and we will have to wait for more data to judge if the economy is slowing.
Manufacturing lost 16,000 in January — the seventh-consecutive monthly decline (ough). This complements Thursday’s report that the closely-watched ISM index of manufacturing activity dipped below 50 in January. After outpacing the economy for much of last year, the manufacturing sector posted negative growth in the fourth quarter for the time since the second quarter of 2003. Friday’s report signals that manufacturing remains in a soft patch.
While nondurable manufacturing employment rose by 12,000 last month, employment in durable manufacturing sectors fell by 28,000. The bulk of this decline was in the motor vehicles sector, which shed 22,.500 jobs in January. After very-strong growth earlier in the expansion, motor vehicle production has moderated significantly over the past several years. And with consumer and business spending on motor vehicles and trucks likely remain sluggish this year, further job losses in this sector are likely.
Upcoming: This-coming Wednesday, the Labor Department will report on 4th quarter productivity. With GDP accelerating in the 4th quarter, I expect we will see an increase in productivity, which has been on the decline in recent quarters. Look for NAM comments on this shortly after the Labor Department releases its report at 8:30 Wed. morning
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