CEPR

January 26, 2018 (GDP Byte)

By Dean Baker

The savings rate is at the lowest level since the peak of the housing bubble.

The Commerce Department reported that GDP grew at a 2.6 percent annual rate in the fourth-quarter, somewhat less than most economists had predicted. The weaker-than-expected growth was the result primarily of weak inventory accumulation and a sharp rise in the trade deficit. However, even with the weaker-than-expected fourth-quarter figure, the 2.5 percent fourth-quarter to fourth-quarter growth rate for 2017 was the best since 2014 when the economy grew by 2.7 percent (the same as its 2013 rate).

Inventories subtracted 0.67 percentage points from the quarter’s growth rate, as final sales grew at a 3.2 percent rate. The $9.2 billion rate of accumulation in the quarter is extremely slow. It is virtually certain that inventories will be adding to growth in the next two quarters.

A sharp rise in the trade deficit subtracted 1.13 percentage points from growth. Exports grew at 6.9 percent annual rate, while imports rose 13.9 percent. Part of the jump in imports was due to an anomalous 0.7 percent drop reported for the third quarter, but it is clear that the trade deficit is again on an upward course.

Consumption was by far the biggest contributor to growth, increasing at a 3.8 percent annual rate and accounting for 2.58 percentage points of the quarter’s growth. Durable goods, and cars in particular, accounted for the largest portion of this increase. Car sales grew at a 16.7 percent annual rate and added 0.4 percentage points to growth. It is likely that this was due in large part to the effect of the hurricanes, which destroyed hundreds of thousands of cars that were later replaced.

The growth in spending in most other areas was more modest. Health care costs continue to be well-contained. After being flat, or even declining as a share of GDP between 2010 and 2015, personal health care services (which account for the overwhelming majority of health care spending) rose in 2016 as a share of GDP, but appear to have leveled off again this year. The nominal growth rate in the fourth-quarter was 5.1 percent, only slightly faster than 5.0 percent rate of GDP growth.

Health Care Services as a Share of GDP, 2000 to 2018

The personal savings rate for the quarter was just 2.6 percent. This is the lowest since the 2.2 percent rate hit in the third-quarter of 2005, near the peak of the housing bubble. Consumption is clearly being driven in part by the wealth created by the run-ups in the stock market and the housing market. The low savings rate should be cause for concern since it will rise if these markets lose some of their recent gains. However, the low number for the fourth-quarter is partly the result of unusually high car sales. Since sales are likely to be weaker in future quarters, that will mean some rise in the savings rate.  

Nonresidential investment grew at a modest 6.8 percent annual rate. Growth of 11.4 percent in equipment spending was offset by growth of 4.5 percent in expenditures on intellectual products and just 1.4 percent on structures. If the tax cut has its promised effect, we should be seeing considerably more rapid growth in investment in future quarters.

Residential investment grew at an 11.6 percent annual rate, but this follows two quarters of declines. This sector is not likely to move in step with GDP in future quarters.

The government sector added 0.5 percentage points to GDP for the quarter, with the gains split roughly evenly between the federal, state, and local sectors. The growth at the federal level was almost all in defense, which grew at a 6.0 percent annual rate in the quarter.

Overall this should be seen as a solidly positive report. The slower pace of inventory accumulation, which was a big drag on growth, will be reversed in future quarters and therefore should be discounted. The trade deficit is a bigger concern, as it could continue to be a drag if it increases further in 2018.

The weaker reported growth for the fourth-quarter will make it harder to sort out trends in productivity. After a big jump in the third-quarter, fourth-quarter growth is likely to be weak due to inventories, as well as a jump in hours due to an unusually large number of reported self-employed. We should get a clear picture in the first-quarter data.