Covering the Economy: BEA January 27 GDP Release: WSJ Economists React
Covering the Economy: BEA January 27 GDP Release: Reuters Immediate Wire

Covering the Economy: BEA January 27 GDP Release: WSJ Friday Morning Roundup

Wall Street Journal morning news roundup: - U.S. GDP Grew at 1.1% Rate As Consumer Outlays Slowed : A WALL STREET JOURNAL ONLINE NEWS ROUNDUP January 27, 2006 12:23 p.m.: The U.S. economy cooled during the final quarter of 2005 as consumers tightened their belts in the face of higher energy prices and the trade imbalance continued to damp growth. The Commerce Department reported Friday that gross domestic product, the broadest measure of U.S. economic output, rose at a seasonally adjusted 1.1% annual rate in October through December. The gain was slimmer than the third quarter's 4.1% increase, and marked the weakest quarterly showing since the final quarter of 2002, when GDP rose 0.2%. For all of 2005, GDP advanced 3.5%. It grew 4.2% in 2004 and 2.7% in 2003.

"While this was a disappointing report, there are signs of a very sharp rebound in GDP growth in the current quarter," economists at Morgan Stanley wrote in a note. Indeed, they wrote they now see a "very good possibility" the economy will grow at a 5% or better rate in the first quarter of 2006, versus their earlier estimate of 4.2% first-quarter growth.

Much of the weakness in the fourth quarter was accounted for by slower consumer spending. Consumer outlays, which account for more than two-thirds of U.S. economic activity, rose 1.1%, after climbing 4.1% in the third quarter. That weakness stemmed largely from a steep drop in spending on big-ticket manufactured items. Purchases of durable goods -- a category which includes automobiles -- plummeted 17.5%, the deepest plunge since a 23.2% drop in 1987's first quarter.

The see-saw pattern of auto sales during the second half of the year played a role in driving down growth in the fourth quarter, according to Steven Wood of Insight Economics, and he also expects growth to recover as car sales stabilize. He noted that car sales surged during June and July "and then collapsed during the following three months. With vehicle sales now recovering, consumer and capital spending, as well as GDP activity, will be stronger."

Outside of the durables category, other consumer spending was relatively healthy. Fourth-quarter nondurables spending rose 5.1%, while services spending went up 3.2%.

Meanwhile, a wide gap between what the U.S. ships abroad and what it purchases from overseas chiseled more than a percentage point from the rate of growth, as U.S. exports rose by 2.4% while imports increased 9.1%. In the third quarter, the picture was more balanced: exports had rised 2.5% as imports rose 2.4%.

Businesses resumed building inventories in the fourth quarter, with stockpiles increasing by $25.7 billion. Companies had cut stocks to the tune of $13.3 billion in the third quarter and $1.7 billion in second quarter. Businesses also increased spending, but at a slower pace than earlier in 2005. Outlays rose 2.8% after climbing 8.5% in the third quarter. Fourth-quarter investment in structures rose 0.7% and equipment and software increased 3.5%.

Real final sales of domestic product, which is GDP less the change in private inventories, fell, slipping at a 0.3% annual rate in the fourth quarter. Third-quarter sales grew 4.6%.

Friday's GDP data also provided more evidence that the housing market is cooling. Residential fixed investment, which includes spending on housing, climbed 3.5% in the fourth quarter, less than half the third quarter's 7.3% rate of increase.

But in a separate report Friday, the Commerce Department reported that sales of new homes took a surprise turn upward in December, increasing 2.9% to a seasonally adjusted annual rate of 1.269 million. An estimated 1,282,000 new homes were sold in all of 2005, up 6.6% from 2004's 1,203,000 and the highest level on record. The yearly figures are not adjusted. Price appreciation of new homes cooled last month. The average price of a home decreased to $272,900, down from a revised $286,000 in November, while the median price fell to $221,800 from a revised $226,800.

Another source of weakness in the fourth quarter was government spending, which had contributed to overall economic growth in prior quarters. In the fourth quarter, government spending declined at a 2.4% pace, the largest drop since the first quarter of 2000. Federal government spending decreased 7.0%, after rising in the third quarter by 7.4%. State and local government outlays increased 0.4%, after inching up 0.2% in the third quarter.

On the inflation front, the government's price index for personal consumption rose 2.6%, after rising 3.7% in the third quarter. The PCE price gauge excluding food and energy climbed 2.2% after rising 1.4%. The price index for gross domestic purchases, which measures prices paid by U.S. residents, rose at a 3.3% rate, after the third quarter's 4.2% increase. The chain-weighted GDP price index increased at a 3.0% rate, compared with a 3.3% increase in the third quarter.