IN A NUTSHELL:
- INDICATOR: Fourth Quarter 2015 GDP and Employment Costs
- KEY DATA: GDP: +0.7%; 2015: +2.4%; Private Domestic Spending: +1.8%; Consumption: +2.2%; Consumer Prices: +0.1%/ ECI (Year-over-Year): +2.0%; Wages and Salaries: +2.1%; Benefits: +1.7%
“The warm winter and low energy prices hurt growth at the end of last year and that helped keep inflation and worker compensation costs down.”
WHAT IT MEANS:
Boy did the economy decelerate at the end of 2015. But the modest fourth quarter expansion hides some decent details. For example, consumer spending was pretty decent. Given that the warm December meant a lot lower heating bills and very little reason to buy winter-related products such as sweaters or shovels, it was actually quite good. The recent blizzard probably caused some change in spending habits, at least here in the East. For all of 2015, consumption grew at the fastest pace in a decade. A drop in business investment in structures was another place where growth was restrained. But that was likely due to the massive cut back in energy activity.
Where we go from here is anyone’s guess, but the cut backs were due to supply side factors, not a decline in demand. Firms also reduced inventories. That too was expected, as there had been some artificially high increases earlier in the year. We are close to more sustainable levels now. One place where there should be continued issues is the trade deficit, which expanded and reduced growth by about 0.5 percentage point. The strong dollar and weak world growth, coupled with a decent U.S. economy, point to a further deterioration in the trade situation.
Final Sales to Private Domestic Purchases, a closely watched measure that removes inventory swings, the government and trade, increased decently, another sign that conditions are hardly dour. Growth for all of last year was the same as in 2014 – good but not great. On the inflation front, there wasn’t any. Consumer prices barely budged and the only component where prices rose even moderately, was housing.
A second report released today was the Employment Cost Index, which measures total compensation cost trends. Surprisingly, it was fairly tame at the end of last year. Wages and salaries, despite all that we heard, didn’t rise very much and benefits remain well under control. Of course, any measure that says wages are declining, yes going down, in the aircraft industry has to be taken with a bit of salt.
MARKETS AND FED POLICY IMPLICATIONS:
Much will be made of the tepid growth coming into this year, but as usual, the looking just at the headline number as an indicator of the state of the economy would miss the more complex underlying trend. Consumers are spending and that should hold up given the 3.2% rise in disposable income in the fourth quarter.
Business investment in equipment fell, but in only one major category, transportation equipment. But that came after huge increases the previous two quarters, so some giveback was not unlikely. And the rig issue is largely unrelated to U.S. economic activity, so we cannot determine where that will go this year. Putting it all together, growth was disappointing, but we clearly shouldn’t fear a recession is imminent, or even in the cards. Instead, a return of winter and some moderation in the energy sector cut backs should allow first quarter growth to be pretty solid.
What needs to change if growth is to accelerate is labor compensation. If wages keep growing modestly, it is hard to see how the economy can grow rapidly. And that would make the Fed’s job even more difficult given the below-target inflation rate.
Joel L. Naroff
is the president and founder of Naroff Economic Advisors, a strategic economic consulting firm. To read more of his blogs, CLICK HERE NOW.
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