What happened to growth

This morning’s GDP numbers for the 4th quarter of 2005 were quite a shock: growth slowed to 1.1% (a rate we used to call a “growth recession” — still positive but not enought absorb the growing population). According to the BEA News Release: Gross Domestic Product:

The deceleration in real GDP growth in the fourth quarter primarily reflected a deceleration in PCE [personal consumption expenditures], an acceleration in imports, a downturn in federal government spending, and decelerations in equipment and software and in residential fixed investment that were partly offset by an upturn in private inventory investment.

Much of this was a large decline in purchases of durable goods (-17.5%) – especially autos. Spending on non-durable goods and services both increased (5.1% and 3.2% respectively). However, the biggest increase in services was in health care — not necessarily a good sign from long term growth.
And while the trade figures for only two of the three months of the quarter are out, BEA estimates there will be a decline in services exports for the quarter.
One worrisome part is the slow down in investment by businesses in equipment and software — down to only 3.5% compared to 10.6%. Most of that slow down was due to an absolute decline in purchasing of transportation equipment, but investments in IT equipment and software and in industrial equipment slowed slightly as well.
The stock market shrugged off the news but economists reactions were mixed. Some forecast high, rebound-type growth in the first quarter of 2006. Others predicted a continuing slow trend. Some even questioned the number, since this is the advanced estimate, and expect large revisions once more data is available.
I try not to read too much into a single data point. However, the projected decline in services exports will bear watching. This may be due to a decrease in tourism and travel – or due to a decline in our intangibles trade balance. Monthly trade figures for Dec 2005 (and consequently for the entire year) come out on Feb 10. I will be looking carefully at that data to see how our intangibles trade is holding up.

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6 thoughts on “What happened to growth”

  1. I would disagree that health care is “just another good.” Another, yes; just, no.
    There are two reasons why I believe the rise in health care spending may not be so good for long term growth. First, health care is consumption, not investment. If consumption spending is rising faster than investment, long term growth will suffer. Having said that, of course, there are time I will argue that good health care, especially preventative care, can be considered an investment.
    Second, unlike other goods, I’m not sure that increased spending results in a better outcome. The general economic problem with health care is that we are not necessarily getting more health for our additional health care spending. Yes, there is some improvement. But this is a murky area. So spending on health care may be more inflationary than real – again, not necessarily a good thing for long term growth.

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  2. I would disagree that health care is “just another good.” Another, yes; just, no.
    There are two reasons why I believe the rise in health care spending may not be so good for long term growth. First, health care is consumption, not investment. If consumption spending is rising faster than investment, long term growth will suffer. Having said that, of course, there are time I will argue that good health care, especially preventative care, can be considered an investment.
    Second, unlike other goods, I’m not sure that increased spending results in a better outcome. The general economic problem with health care is that we are not necessarily getting more health for our additional health care spending. Yes, there is some improvement. But this is a murky area. So spending on health care may be more inflationary than real – again, not necessarily a good thing for long term growth.

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  3. GDP Grade for the 4th Quarter

    Sorry for the delay – Friday’s announcement that real GDP grew at a 1.1% rate in the 4th quarter grades out at: A D using my standard scale, which is tougher than most college classes. A C using a curve

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