Fourth Quarter Real GDP on a Slippery Slope

Real GDP declined at an annual rate of 3.8 percent in the 4^th quarter. However, that includes additional inventory "investment" worth 1.32 percentage points. Excluding inventory changes, "real final sales" declined at an annual rate of 5.1 percent, the more meaningful number since the inventory building was likely involuntary and doesn't auger well for the current quarter.

Additions and subtractions from growth from the 3^rd to 4^th quarter 2008 were as follows:

Real GDP -3.8 percent (third to fourth quarter)

Consumption (personal) -2.47 percentage points
Investment (private domestic) -1.80 percentage points
Net exports (goods & services) +0.09 percentage points
Government spending +0.38 percentage points
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-3.80 percentage points

Keeping in mind that the 4^th quarter numbers are "advance" estimates based on incomplete data and will be revised twice, the changes from 2007 to 2008 are as follows:

Real GDP +1.3 percent (2007 to 2008)

Consumption +0.20 percentage points
Investment -0.91 percentage points
Net exports of goods and services +1.41 percentage points
Government spending +0.58 percentage points
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+1.28 percentage points

The changes from the year as a whole to the 4^th quarter are instructive. Net exports (exports of goods and services minus imports) remained a positive for GDP growth, but a smaller positive. Actually, we have negative net exports (imports>exports) which declined-a negative times a negative is positive. If the dollar continues to depreciate despite a remaining large trade deficit, net exports are likely to turn into a net negative.

In the last month (to November) both exports and imports declined, but imports declined more. The shrinkage of the deficit is good, but declining overall trade, which is going on worldwide, is not. A worldwide recession will only be exacerbated by a downward spiral in world trade.

Traditionally, we have to guard against competitive currency devaluations during recessions. Other protectionist measures are also a threat, including the inclusion of "buy American" features of the House stimulus bill-a very bad idea.

The accelerated decline in real GDP in the 4^th quarter is matched by a sharp deterioration in the labor market-a topic for a separate post. We are in for a deep and likely prolonged recession.