Yesterday's government report on the economy's growth, which told us that the nation's gross domestic product grew at an annual rate of 2.6 percent during the fourth quarter, sharply underachieved analysts' expectations of an annualized 3.0 percent to 3.6 percent. The stock market clearly reacted negatively to the downside surprise. Bloomberg's take at the end of the day: "U.S. stocks fell Friday, sending the Standard & Poor’s 500 Index to its biggest monthly decline in a year, as weaker-than-forecast economic growth overshadowed a rally in energy shares sparked by a surge in the price of crude."
That didn't stop Martin Crutsinger and Josh Boak at the Associated Press from celebrating the result in late-morning and overnight reports, respectively. Meanwhile, Josh Mitchell at the Wall Street Journal delivered a more sanguine take on the situation.
Mitchell correctly pointed to "a lack of vigor in the economic expansion," and pointed out that the third quarter's 5.0 percent result had a fluky element (bolds are mine throughout this post):
U.S. Economy Hits Speed Bumps
Strength in Consumer Spending Is Challenged by Weakness Abroad, Wary Businesses
The U.S. economy entered 2015 on the most robust streak of consumer spending in years, yet when the first growth figures for 2014 came out Friday they underscored the lack of vigor in the current expansion.
Gross domestic product, the broadest measure of goods and services produced across the U.S., notched an annual growth rate of 2.4% for 2014, the government said Friday, just a touch better than the sluggish average of the nearly six-year-old recovery—and far from the 4% growth of the late 1990s. Fourth-quarter GDP was 2.6%, roughly half the summer’s blowout 5% pace, which was aided in part by a spree of military purchases that wasn’t repeated.
The report offered both hope and red flags for the world’s largest economy. Households, boosted by a surge in hiring and a slide in gasoline prices, went on their biggest spending spree in almost nine years in the fourth quarter amid signs of rising consumer confidence.
But U.S. companies suffered a dual blow. Imports rose briskly as Americans bought foreign goods that were effectively made cheaper by the strengthening dollar. And the slumping world economy tamped down demand for U.S. exports. That caused the trade gap to widen, slicing a percentage point off economic growth.
Businesses also reined in capital spending, particularly on equipment, after stepping up such outlays in the spring and summer.
“Outside of consumer spending, it’s hard to argue for a lot of momentum,” said Scott Hoyt of Moody’s Analytics.
The final bolded sentence is especially interesting, given how Crutsinger's report at AP tried to explain that item away:
But business investment in equipment shrank after big increases in the previous two quarters. Economists partly blamed the weakness on cutbacks in oil and gas drilling by energy companies grappling with the plunge in energy prices.
I would guess that it's a small part. The barrel price of oil didn't stay below $80, roughly the area where costly drilling methods often becomes financially problematic, until just before Thanksgiving. Additionally, though it reported a decline in new orders, the Census Bureau's durable goods report for December showed no meaningful changes from a GDP-influencing standpoint in shipments in any listed category. So it appears that any such cutbacks won't have a significant influence until this year's first quarter.
But consumer spending is apparently just about all that matters at AP, especially as seen in Boak's overnight report:
WHAT SLOWING ECONOMY? US CONSUMERS ARE IN A MOOD TO SPEND
... The U.S. economy as a whole expanded at a 2.6 percent annual rate, the government said Friday, down from a sizzling 5 percent gain the previous quarter. Yet consumers signaled their optimism by spending at the fastest rate in nearly nine years.
"This hasn't changed my picture on the strength and resilience of the U.S. economy," said Scott Anderson, chief economist at the Bank of the West. "Almost all the drivers of consumer spending are pointing in the right direction."
Nearly six years into the recovery from the Great Recession, the economy has finally gone from straining just to grow to posting consistently solid gains. The gains have come even though many households continue to struggle without much of a financial cushion. Nearly half say they spend all their income, go into debt or use savings to meet their expenses, a new analysis by the Pew Charitable Trusts has found.
... collectively, consumers and investors are showing renewed faith in the economy.
On Friday, the University of Michigan said its sentiment index found that U.S. consumers are more confident than they've been since 2004. Also Friday, the government said wages and benefits are ticking up, a sign that steady job gains may be compelling employers to pay a bit more.
Most indicators suggest that the economy has surpassed a psychological threshold that has made businesses more comfortable with hiring and infused consumers with more enthusiasm.
There is a bit of a problem with all of this in the GDP report, namely that 0.83 points, or almost one-third of the reported increase, came in the form of increased inventories. Either the inventory increase or the consumer spending surge would seem to be suspect, and vulnerable to downward adjustment in the government report's next two revisions. If not, it would seem that manufacturers may have overproduced, and will have to pull back during the first couple of quarters this year.
Amidst all the enthusiasm, Boak inadvertently identified the core problem: People are broke, but, partially because of over-the-top positivity peddling by the press (something almost never seen during a Republican or conservative presidential administration, but constantly visibility when a Democrat is in the White House), they're spending anyway, making the economy vulnerable to a sharp pullback if consumers begin to sense that the economy is starting to go the wrong way again.
Near the end of his write-up, with the help of an "expert," the AP reporter formulated a fallback explanation if such a reaction occurs, which conveniently avoids holding U.S. economic policy accountable:
At the same time, (economist Carl) Tannenbaum of Northern Trust cautions against becoming too complacent if consumers begin to fear that the economic woes abroad threaten the U.S. job market or financial markets.
That's right. If things don't go as planned, they'll just blame it on the rest of the world. As has been the case for six years, it's never the fault of Democrat-driven economic policies.
Cross-posted at BizzyBlog.com.
