USA Outlook Update (January 28, 2006): GDP of 4-th Quarter of 2005

Real GDP of the 4-th quarter of 2005 has grown only 1.1% in the preliminary report issued on the morning of Jan. 27, 2006. Though we have been predicting an unpleasant economic surprise at the end of 2005 and a sub par growth rate of real GDP in 2006, we have anticipated only the drop of growth rate to about 2.5% in average during 2006, and thus an economic recession will not ensure in 2006. However, with this unexpected sharp drop of real GDP growth rate, we better reassess the situation carefully instead of blindly claiming that real GDP growth will rebound strongly in the first quarter of 2006 and beyond to save the situation. This report is preliminary since many statistics of December of 2005 are not yet available at the time of this GDP compilation and must be estimated. By the date of the next update, Feb. 28, 2006, the picture will be clearer and real GDP growth rate of the 4-th quarter of 2005 probably will be revised up somewhat from the 1.1 % growth rate. Before we discuss the uncertain coming update, we need to notice an anomaly in the recent GDP reports that has nothing to do with the future updates. The anomaly is in the component of federal government expenditure. In the 3rd quarter of 2005, this component in real GDP zoomed +7.0% and in the 4-th quarter dropped -7.4%. This erratic behavior of government expenditure has nothing to do with hurricane Katrina, as some economists are attributing. The Katrina spending goes into non-defense spending of government expenditure; the non-defense spending went up 2.4% in the 3rd quarter of 2005, contributing +0.06% to the 4.1% growth of real GDP, and went up 6.9% in the 4-th quarter of 2005, contributing +0.15% to the 1.1% growth. The culprit of the erratic government expenditure is the defense spending. In the 3rd quarter of 2005, the defense spending went up 10.0% and contributed about 0.5% to the 4.1% growth in real GDP. In the 4-th quarter of 2005, defense spending went down -13.1% and contributed -0.7% to the 1.1% growth of real GDP. It is unlikely that Iraq war spending is going through such a roller coaster ride. It is probably the over budgeting of military hardware related spending that caused the indigestion and prevented a smooth expenditure over the whole fiscal year. As the end of fiscal year drew near, the frenzy to spend the allocated left over money ensured, and the frenzy of spending died away as the new fiscal year dawned, creating this huge gyration. This kind of erratic behavior in military spending, of course, has nothing to do with the performance of the real economy. Thus we subtract 0.5% from the 3rd quarter real GDP growth and add back 0.7% to the 4-th quarter GDP, making them to grow 3.6% in the 3rd quarter and to grow 1.8% in the 4-th quarter of 2005 respectively.

The personal consumption expenditure of December of 2005 is only an estimate that must be made to complete the estimate of GDP. From the GDP estimate, the December number is put to grow almost 17% (annualized) from the November number. The overall personal consumption expenditure of the 4-th quarter of 2005 is estimated in the GDP report as has grown 4.1% (annualized) from that of the 3rd quarter, before adjusting for inflation. Whether December personal consumption expenditure has really raised so much compared to November number is a question; the official number will be announced on January 30, 2006. If December personal consumption expenditure is not as strong as the GDP report estimates, it may reduce real GDP growth up to 0.5%. If that happens, the deficit of consumer goods trade in December will not grow. Capital goods export is growing due to the effect of weak dollar in the stretch of 2003 to 2004, and oil imports were checked in December due to the stagnated oil price in that month. We expect that the overall trade deficit of goods in December will be in line with November figure, about 68.9 billion dollars or less. However, in the preliminary GDP report, December goods trade deficit is estimated to be around 71.7 billion dollars. If our estimate of December goods trade deficit is correct, real GDP will receive a boost of around 0.8% point. The actual trade deficit of December will be announced in the middle of February. Some economists feel that the business investment in equipments and software is under estimated and inventory somewhat over estimated. Considering all those factors, the revision of GDP may boost real GDP growth to near 2%. Then adding the 0.7% boost from the correction to the erratic behavior of military spending as discussed before, the actual economy may be growing more than 2.5% in the 4-th quarter of 2005. We feel that the growth of real GDP for 2006 should be around 2.5% as originally projected, and an economic recession is not likely, unless Iranian situation gets out of hand, as mentioned in the previous update and in Article 2A.