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GDP Growth well below expectations in Q4 2007

By blackhedd Posted in Economy | GDP — Comments (6) / Email this page » / Leave a comment »

The Commerce Department reports this morning that the US economy grew at an annual rate of 0.6% in the fourth quarter of 2007. This preliminary estimate (which will be revised twice in coming months) was about half the rate expected by many economists. Keep in mind that this is a look backward rather than forward in time. Still, it's a big disappointment. You probably recall that the economy grew at an annualized 4.9% in the third quarter.

The weakness was across the board, with all categories (consumer spending, inventories, capital spending by business, and exports) performing well below Q3. There really weren't any bright spots.

The preliminary estimated GDP growth for all of 2007 came in at 2.2%, slightly above the 2% that I've been predicting since early last year.

Read on for a bit of analysis...

It seems clear that the US economy is in for a soft patch which will probably last several years. I'm avoiding the word "recession" for a couple of good reasons.

First, as I've said elsewhere, I'm already spotting signals that the credit-market conditions are beginning to ease around the world. We've been in a recession, and it's already nearly over. I expect that GDP indicators will turn upward either in the current quarter or in Q2 of 2008. Keep your eyes on inventory levels. These shrunk so much during Q4 that they will necessarily generate at least some growth in 2008.

Second, the softness in the US economy is secular rather than cyclical. Much of the organic dynamism, if you will, in the US economy has come from illegal immigration. And much of that has been catalyzed by the now-ended boom in housing. Both factors have now largely been washed out of the picture.

The sectors of the US economy that we need to look to for growth-leadership now are healthcare and government. Neither one is likely to generate above-market rates of return on capital. The real growth is happening elsewhere in the world.

Additionally, the financial world is at a crossroads. We've been through a global crisis that has many questioning the dogmas of modern portfolio theory, most particularly statistical risk management and the so-called "Value-at-Risk" models. Since greed knows no bounds, there is almost certainly a raft of hot young PhD physicists and mathematicians quietly trying to figure out the next big money-machine to follow mortgage-backed securities.

But there also are a great many institutional portfolio managers who are questioning their whole approach to risk. And these people will wait for leadership. The amount of capital available for business growth in the developed countries will probably lag behind its historical trend for the next several years. This is a big part of why the US economy will keep growing, but at a muted pace. It's also why the US government will continue to be one of the world's most popular investments.

The outlook for US financial markets is mixed on this news. Stock markets will fall on what is perceived to be a dimmer outlook for corporate earnings. The bond markets and currency markets have barely moved. All eyes continue to focus on the Federal Reserve's Open Market Committee, which is widely expected to cut interest rates again today at their regular meeting.