Inventories give extra lift to Q4 GDP

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This post is a guest contribution by Asha Bangalore* of The Northern Trust  Company.

Real GDP grew at an annual rate of 5.7% in the fourth quarter of 2009, after a 2.2% increase in the prior quarter.  Inventories made the largest contribution (+3.4%) to real GDP in the fourth quarter, followed by exports (+1.9%) and consumer spending (1.4%).  The large contribution from inventories is a one-off event, with a repeat story is unlikely in 2010.  In the fourth quarter, liquidation of inventories was significantly smaller than the prior quarter (-$33.5 billion vs. -$139.2 billion in Q3) as spending improved in the economy.  Real final sales advanced at an annual rate of 2.2% in the fourth quarter vs. 1.5% in the third quarter.  On a year-to-year basis, real final sales held nearly steady after four consecutive declines.


On an annual average basis, real GDP fell 2.4% in 2009, the largest annual decline on record in the post-war period.  The GDP deflator rose moved up 1.2% in 2009, while the Consumer Price Index fell 0.3% in the same period.


In the fourth quarter, consumer spending increased 2.0% after a 2.8% gain in the third quarter brought about by the “cash for clunkers” program.  Residential investment expenditures rose 5.7% after an 18.9% jump in the third quarter.  Optimism about the first-time home buyer program suggests that residential investment expenditures should make a significant contribution to real GDP in the first quarter.  Outlays on equipment and software rose 13.3% in the fourth quarter compared with a 1.5% gain in the prior month.  Motor vehicles added 0.6 percentage points to real GDP in the fourth quarter vs. 1.45 percentage points in the third quarter.  The structures component of real GDP declined at an annual rate of 18.4%, marking the sixth consecutive quarterly drop.  Additional weakness in these outlays during 2010 should not be surprising given the fragility of demand and soft labor market conditions.


Exports increased at an annual rate of 18.1% and are predicted to continue to play a major role supporting real GDP growth in 2010.  Net exports narrowed to $341.1 billion in the fourth quarter from $357.4 billion in the third quarter.  Government spending slipped 0.2% in the fourth quarter after a 2.6% gain in the prior three-month period.  The impact of the stimulus package (non-defense spending moved up 8.1%) was more than offset by the 3.5% decline in defense spending and a small drop in state and local government spending.  The price indexes (see chart 4) are contained, with no imminent threat of inflation.  Soft demand conditions are projected for the first three quarters of 2010, followed by a more robust performance in the final three months of the year.


In other related economic news, the Employment Cost Index (ECI) rose 0.5% in the fourth quarter, a slightly larger increase than the 0.4% increase seen in the prior quarter.  Wages and salaries and benefits posted gains of 0.5% in the fourth quarter vs. a 0.4% increase in the third quarter.  On a year-to-year basis, the ECI moved up 1.5%, matching the increase seen in the third quarter.  As seen in chart 5, the year-to-year change in the ECI is holding at a record low mark.  The main message is that labor costs do not present an inflationary threat.


The FOMC is expected to hold the federal funds rate unchanged at 0%-0.25% until August. The policy statement of January 27 FOMC painted a more upbeat picture of the economy compared with the December 16 policy announcement. The nature of future economic reports holds the key to the timing monetary policy tightening.

* Asha Bangalore is vice president and economist at The Northern Trust Company, Chicago. Prior to joining the bank in 1994, she was consultant to savings and loan institutions and commercial banks at Financial & Economic Strategies Corporation, Chicago.

Source: Northern Trust – Daily Global Commentary, January 29, 2008.

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1 comment to Inventories give extra lift to Q4 GDP

  • Frank W

    Well, I got this one dead wrong! I did not think there was any chance of GDP coming in in the 5-6% range. I did not believe that businesses would build up inventory to that extend with such high and rising unemployment. I thought 3-4% would be something to jump for joy about. Of course, this GDP number is subject to two revisions. If it gets revised down the same percentage as in the previous quarter, then the GDP number should fall to around 4%, which is still a good result. But what puzzles me more than the 5.7% reading for 4Q9 GDP, is the DJIA sagging 50 something points after its annocement! You’d think the markets would go ballistic, wouldn’t you? Maybe investors don’t believe the number or think that it is a one-off event, which will not be duplicated in coming quarters.

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