Among the things you should worry about, the downward revision to fourth quarter GDP growth reported by the Commerce Department should not be high on the list. The latest estimate puts the annualized growth rate at 2.4 percent, down from 3.2 percent in the advance estimate released in January.
Looking at the details, downward revisions were made to the estimates for consumer spending, exports, and state and local government spending. Partially offsetting those downward revisions was a significant mark-up to the growth rate of business fixed investment, to a 7.3 percent pace from 3.8 percent.
The news of weaker fourth quarter GDP comes on the heels of a series of sluggish economic reports, which analysts have largely attributed to the effects of prolonged severe weather across much of the country. Fed Chair Yellen addressed the issue in congressional testimony yesterday, noting, “We will try to get a firmer handle on exactly how much of the soft data can be explained by the weather and how much is due to a softer outlook.”
The downward revision to GDP growth raises concerns in some quarters that the economy had already begun to soften in the fourth quarter—corresponding to the months of October, November, and December—before severe weather hit in December, January, and February. But keep in mind that the government shutdown at the start of the quarter, in October, directly subtracted 0.3 percentage points from GDP growth through the government spending component. The extent of the impact of severe weather effects at the end of the quarter, in December, is harder to quantify. Without those two exogenous factors, though, we likely would have seen significantly stronger GDP growth last quarter.
There is no indication that the underlying trend in the economy has weakened substantially. A key measure of domestic demand, real final sales to private domestic purchasers, rose 2.8 percent in the fourth quarter, just below the four-year average growth rate of 3.0 percent. This suggests that domestic demand remains resilient. What’s more, the latest reading on AIER’s latest Business-Cycle Conditions (BCC) indicators points to “strong economic momentum” at the end of 2013.
So we believe that transient factors were largely responsible for the fourth quarter slowing of GDP, and that the improving underlying trend will reassert itself in coming months.
That said, first quarter GDP results are unlikely to be spectacular given the severe weather events in January and February—and we have yet to see what mother nature will bring us in March. But a catch-up in economic activity from weather-depressed levels early in the first quarter should be forthcoming.
With the underlying economy likely to stay on an improving track, we expect monetary policy to stay on course as well, with the Fed likely to continue to taper its large-scale asset purchase program over the next several meetings. For more on Fed policy and AIER’s economic outlook, stay tuned for our upcoming BCC report, due out next week.