The Federal Reserve set out to slow domestic demand, and slow it the central bank did. Final domest...
The Federal Reserve set out to slow domestic demand, and slow it the central bank did.
Final domestic demand, officially known as final sales to domestic purchasers in the recent gross domestic product report, rose at less than one-third the pace in the fourth quarter of 2000 as it did in the first.
The 2.1% rise last quarter represents the slowest pace for final domestic demand since the first quarter of 1993, when broad money supply growth had come to a halt following the resolution of the savings and loan crisis.
For what it is worth, broad money supply growth is accelerating. The spurt started even before the Fed lowered interest rates on 3 January.
With the cost of borrowing in the commercial paper market prohibitive for all but the highest rated companies in the approach to year-end, corporations tapped their bank credit lines. The broad monetary aggregate M2 rose an annualised 12% in December, a pace last seen when companies were closed out of the credit markets in the latter part of 1998 and relied on bank loans instead.
Real GDP expanded at a 1.4% annualised rate in the fourth quarter, the smallest advance in five-and-a-half years. Driving growth were consumer and government spending, both of which rose 2.9%.
The breakdown of consumer spending is also worth noting. While consumer purchases of durables fell 3.4%, spending on services expanded 5.3%, the fastest pace in 13 years.
Some of the increase was down to utility consumption: last November and December were the coldest in the US in 105 years of record-keeping by the National Weather Service.
Granted, services spending is less discretionary in nature and therefore less interest-rate sensitive than goods purchases. But still, the fast spending pace on services suggests the consumer is far from dead, even if the gloom and doom in the press is starting to get to them.
Consumer confidence plummeted in January, with the Conference Board's index of consumer expectations falling 20 points, the biggest one-month decline since October 1990. Curiously, when it comes to assessing of the job market, the consumer is still relatively upbeat. In January, 49.2% of consumers said jobs were plentiful, down slightly from a multidecade high of 55.8% in July.
Reality is intruding on the pessimistic headlines and recession forecasts. For all the high-profile lay-off announcements, the unemployment rate remains near a 30-year low at 4%.
Many of the people getting pink slips are being redeployed elsewhere.
All of the other categories in the GDP report had negative signs in front of them. Within non-residential fixed investment, structures rose 9.3% but that was more than offset by a 4.7% decline in equipment and software, which gets a bigger weighting in GDP. The latter category is a proxy for capital spending, which has been responsible for the gains in productivity growth in the late 1990s. The decline in the fourth quarter of 2000 was the first in five years.
During that time period, business investment in equipment and software averaged 9.6% on a quarterly annualised basis. The downshift in investment spending, should it continue, will have negative ramifications for productivity growth.
Fourth-quarter GDP was depressed by a 24.4% dive in vehicle output, which subtracted a full percentage point off growth, according to the Commerce Department.
If there was any good news in the GDP report it was that inventories subtracted, albeit modestly, from growth. Economists expect the inventory drawdown to be a huge drag in the first quarter of this year. The sooner businesses get on with it, the better.
Firms have responded to the pullback in consumer and business spending by curtailing production. Manufacturing output fell 2.1% in the fourth quarter, the first decline since the last recession in 1991. It remains to be seen whether production fell more than sales.
Based on the GDP report, the output measure used to compute non-farm productivity rose 1.2%, implying productivity growth of 2- 2.25% in the fourth quarter, according to Melanie Hardy, an economist at Bear Stearns & Co.
So here we have money supply, the tinder for inflation, growing rapidly and labour productivity slowing sharply at a time when the Fed has shown itself committed to goosing demand. It is not the outcome everyone expects, but it is an outcome that cannot be dismissed.
Caroline Baum is in the Bloomberg New York newsroom
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