U.S. “real” (i.e., inflation-adjusted) gross domestic product (GDP) in 2011 rose 1.7%, according to the latest report from the Bureau of Economic Analysis (BEA).
The 1.7% advance was a slowdown versus 2010’s 3.0% gain, but keep in mind that the recession caused output to contract by 3.5% in 2009.
More interesting than the latest annual result, at least when it comes to assessing the future, are the latest quarterly numbers.
In Q4 of last year, seasonally-adjusted GDP increased at an annualized rate of 2.8%.
While this disappointed some analysts, who were expecting +3.0% or higher, it should be noted that it was the fastest rate of growth in the year.
In fact, GDP throughout 2011 speeded up in each consecutive quarter, with Q1 at +0.4%, Q2 at +1.3% and Q3 at +1.8%.
Q2 2010 (+3.8%) was the last time Q4 11’s growth rate was exceeded.
I’ll return to some of the important line items in the GDP report, such as investment (which determines construction activity) in a moment.
But there’s more to be said about the overall GDP number. In particular, there are monthly results that should also be looked at.
To help with more current analysis, there is also a “Personal Income and Outlays” report from the BEA.
December’s income report was published by the BEA one business day after the quarterly GDP results.
One of its chief uses is to provide insight into how the fourth quarter ended.
The good news is that personal income in the latest month rose at a very fast rate, +0.5% month to month in current dollars. In November, the increase was only 0.1%.
Disposable income, which is income after taxes, also climbed at a rapid pace, +0.4%.
This is confirmation that the improvement in jobs (+200,000 in December) is being reflected in earnings.
On the other hand, the surge in incomes isn’t yet contributing to GDP.
The reason we know this is because personal consumption expenditures in December stayed flat (0.0%) in current dollars and actually declined (-0.1%) in constant dollars.
The difference between income and spending shows up in the savings rate.
“Personal saving as a percentage of disposable personal income” rose to 4.0% in December from 3.5% in November.
The term “saving” is a bit of a misnomer. To most people, it would suggest money stuffed away in a piggy bank or under a mattress.
In actual fact, it’s a residual number. It’s what’s left over in a mathematical calculation that subtracts a lot of expenditure items from income.
What it represents, for the most part, is money that has gone towards paying down debt.
Given the most recent climb in the savings rate, the best interpretation is that Americans are still engrossed in climbing out of their financial holes.
In the long run, that will be a strong plus for the economy. It will eventually free up money to be spent in a variety of areas.
For example, it’s a necessary first step before home prices can firm up and then appreciate.
Many economic arguments are circular. For example, what would really help the economy?
An improvement in confidence is maybe the best answer. And what could cause such an improvement?
We’ve already talked about two key factors. Ongoing improvement in the jobs market is crucial. And a gradual turnaround in home prices is another.
Let’s return to the more complete data on the economy that is laid out in the quarterly GDP report. It contains many more line items than the monthly income report.
The biggest support to output levels in the latest quarter was inventory accumulation. U.S. manufacturing has been making a comeback of sorts.
The Institute of Supply Management (ISM) reports 29 months in a row of expansion in the sector.
Activity levels have been especially strong in the domestic motor vehicle market and in export sales of construction and agricultural equipment to emerging nations.
Residential investment in Q4 was +10.9%, its best performance since Q2 2010 (+22.8%). The quarter-to-quarter changes in this category have been negative for most of the past six years.
The government consumption and expenditure portion of GDP in Q4 was also negative, -4.6%. It was the fifth straight quarter of decline. Austerity measures have been needed to rectify the nation’s deficit and debt problems, but they have been acting as a drag on the overall economy.
With China’s expansion exhibiting some hesitation, the improvement in the U.S. economy couldn’t come at a better time for Canada.
Despite all our efforts to sell resources into the developing world, the traditional pattern of Canada riding the coat-tails of the U.S. is likely to be restored, at least temporarily, in 2012.
U.S. Real Gross Domestic Product (GDP)
quarter-to-quarter per cent change annualized
U.S. Real Gross Domestic Product (GDP)
year-over-year per cent change