Fourth Quarter GDP Reverts to the Weak New NormCommentary by Bob McTeer
January 31, 2015
Real GDP increased at only a 2.6 percent annual rate from the third to the fourth quarter 2014, about half the 5 percent increase in the third quarter. Without inventory accumulation, the increase would have been 1.8 percent, down from 5 percent in the third quarter. Consumption added 2.9 percent to the growth (more than all of it) with business equipment (needed for productivity increases) actually declining slightly. In other words, the headline numbers were disappointing and the underlying detail made them worse, not better. The deceleration in growth was slightly more than most forecasters had expected.
So, 2014 began with severe winter weather contributing to a 2.1 percent decline in the first quarter. The second and third quarters bounced back with growth rates of 4.6 percent and 5 percent respectively. The lower 2.6 percent growth in the 4th quarter brought the average down to the recent weak norm. Looking at 2014 as a whole compared to 2013, the real GDP increase was only 2 percent. This reversion to the mean brings us back to our 2 percent economy of recent years.
The price index embedded in the GDP statistics (the GDP deflator) came in at a negative 0.3 percent in the fourth quarter, down from a 1.4 percent increase in the third quarter. The core index, excluding food and energy, increased 0.7 percent in the fourth quarter.
We are entering a period when the FOMC will likely be paying more attention to the core indexes since the headline indexes will be reflecting the extraordinary decline in oil prices, which the FOMC likely sees as special factor if not a temporary factor. They will think that the core indexes are an even better gage of future price behavior than usual.
For those who are mystified by the slowdown, I suggest they take a serious look and what’s been happening to the money supply. While it was never growing as rapidly as most Fed critics assumed, it has actually slowed down recently. The last three month’s growth in M2 ending December 31 was only 5 percent; the 6 and 12 month growth rates were 5.2 percent and 5.8 percent respectively. If the velocity of M2 continues to decline as it has in recent years, about 3 percent per year, the effective growth rates will be very low indeed.
Ironically, an inadvertent tightening of money growth precedes the promised “normalization” of interest rates, which implies further tightening. All this in an economy that stubbornly reverts to a 2 percent mean.