Magazine article Economic Trends

Economic Activity

Magazine article Economic Trends

Economic Activity

Article excerpt

The Commerce Department's preliminary reading of real GDP growth for 2005:IVQ was 1.6%, up 0.5 percentage point (pp) from January's advance reading. The final 2005:IIIQ growth was 4.1%. The preliminary report's upward revision resulted primarily from upward revisions to exports, government spending, equipment and software, and change in inventories, partly offset by an upward revision to imports.

Most components' contributions to the change in real GDP decreased in 2005:IVQ. The two exceptions were change in inventories, which added 2.1 pp, and exports, which added 0.3 pp, compared to 2005:IIIQ. Imports subtracted 2.0 pp after deducting only 0.4 pp last quarter. Personal consumption expenditures, which traditionally makes the largest positive contribution to GDP, added only 0.8 pp, versus 2.9 pp the previous quarter.

The GDP growth rate has averaged 3.296 over the past 30 years, twice as high as the 2005:IVQ preliminary reading of 1.6%. In fact, the preliminary estimate was the lowest since 2002:IVQ. However, as of February 10, the Blue Chip panel of economists predicted that 2006:IQ growth will be 4.1%, up 0.5 pp from their. January estimate. For the rest of 2006, they expect growth between 3.0 and 3.4%.

Since personal consumption is typically the largest component of GDP, its trends are important for the overall economy. Although real personal consumption expenditures are growing, the year-over-year annual growth rate has slowed to 3.0%. In fact, it is a bit surprising that consumers have not reined in spending more, considering that year-over-year growth in the more variable real disposable personal income slowed from 4.1% in 2004:IVQ to only 0.5% in 2005:IVQ.

Growth in federal receipts for January 2006 has increased 13.7%, on a year-over-year basis. Outlays over the same period were only up 7.9%, easing the budget deficit by about 21%. Nonetheless, the deficit's 12-month moving average is still $25.6 billion per month.

In 2005, all the major spending categories increased faster than GDP's 3.5%. The fastest-growing category was federal outlays on interest, up 20.3% from 2004 to 2005, the result of the one-two punch of rising deficits and interest rates. National defense, at 8.7%, was the next fastest. Social Security and health grew at slower rates, 5. …

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