Fourth-Quarter GDP Growth and a Look Forward
Real GDP growth in the fourth quarter of 2010, originally reported in January as 3.2 percent, settled in at 3.1 percent following the two usual revisions. For the year, real GDP grew 2.9 percent, beating out the January Blue Chip consensus projection of 2.8 percent growth, but falling short of Blue Chip’s 3.1 percent midyear estimate.
Real GDP and Components
Annualized percent change, last:
|Business fixed investment||25.9||7.7||10.6|
|Change in private inventories||16.2||—||—|
Source: Bureau of Economic Analysis.
Digging into the expenditure details, fourth-quarter growth was supported in large part by a 4.0 percent rise in personal consumption spending, which contributed 2.8 percentage points of growth. This jump was maily due to a 21.1 percent increase in durables spending—the strongest single quarter of growth in this component since the fourth quarter of 2001. Net exports also made a large contribution (3.3 percentage points), as imports plunged 12.6 percent following three consecutive double-digit increases.
The reversal in the trade contribution is quite likely connected to the huge 3.4 percentage point drag on GDP growth arising from inventory accumulation. Although inventories rose, they did so at a much slower pace in the third quarter. After months of inventory building, which not only boosted domestic production but also pulled in sizeable quantities of imported goods, wholesalers and retailers slowed the pace of restocking in the fourth quarter, curtailing imports. Combined, the contributions from net exports and inventories nearly cancel, providing a net reduction of only 0.1 percentage point.
Business fixed investment also provided some lift to fourth-quarter growth. Although not the double-digit increase recorded earlier in the year, spending on equipment and software rose a respectable 7.7 percent, and spending on structures rose 7.7 percent for its first increase since the second quarter of 2008. Residential investment eked out a small 3.3 percent increase in the fourth quarter, which contributed 0.1 percentage point to the total. Finally, government spending declined 1.6 percent (subtracting 0.3 percentage point), following two consecutive increases of roughly 4 percent.
The short-run outlook for GDP growth is clouded by a series of first-quarter shocks, whose effects will be of uncertain size and duration. The hit to output due to the atypically widespread and severe winter storms of January is likely to be confined to the first quarter. Political unrest in the Middle East and North African nations have driven oil prices higher due both to minor supply disruptions and the potential of more severe disruptions down the road. These events continue to play out.
Supply shocks of these sorts partly manifest as weaker labor productivity, or output per labor hour. Both winter storms and major earthquakes, for example, curtail productivity by creating bottlenecks in the supply chain that leave workers short of material for periods of uncertain length. The political unrest in the Middle East that raises the price of crude oil causes firms to economize on related energy and material inputs, which slows production and weakens productivity.
Gauging the overall damage to U.S. labor productivity that will follow from the shocks is difficult. As macroeconomists we typically lack the counterexample—we do not observe the world in the absence of the shocks. But following back-of-the-envelope calculations to forecast first-quarter productivity growth offers a way to think about the problem. First, we need an estimate of real GDP, and although the “advance” estimate for the first quarter will not be available until the end of April, a good deal of the monthly information that will eventually comprise the real GDP estimate has already come in. Our “bean-counting” suggests real GDP growth of a bit more than 2 percent in the first quarter, so let’s stick with 2 percent as a convenient placeholder.
The output concept used by the Bureau of Labor Statistics (BLS) to compute the most widely used and reported measure of labor productivity, however, is drawn more narrowly and includes only the nonfarm business sector (currently about 75 percent of GDP). Sectors in which obtaining an accurate labor input measure is especially problematic (including the government), are excluded. Our calculations imply that nonfarm business output grows a half percentage point faster than total output, which in our current scenario would be 2.5 percent. Much of the difference between the two output estimates is due to slower growth in the government sector, which is excluded from nonfarm business output.
Next, we consider the labor input. The monthly record on private, nonfarm labor hours as part of the BLS’s establishment survey on payroll employment is now complete through March. The BLS will eventually adjust these numbers so that they more accurately reflect the labor input. For example, they must not only measure hours of work in business establishments, but also those of the self-employed in nonincorporated businesses. We estimate that nonfarm business labor hours rose 1.5 percent in the first quarter, which, together with our 2.5 percent rise in output, implies a 1.0 percent rise in labor productivity.
That is a lot lower than productivity growth in the previous quarter and considerablly lower than trend productivity growth, which could range between 2 percent and 2½ percent. Do these gaps reflect the disturbance to labor productivity caused by the shocks? To some extent, yes. Assuming that labor hours were mostly unaffected by the shocks, an answer to this question ultimately depends on what one believes output growth would have been in the absence of the shocks, and the degree to which that belief is held. There are a lot of moving parts here, but it’s a start.