Our Read on the GDP Numbers

We had a busy week for economic reports last week, with the fourth quarter 2008 report on gross domestic product () leading the way. Real GDP fell at a seasonally adjusted annual rate of 3.8% in the fourth quarter of 2008, according to the first or "advance," estimate from the Commerce Department. This was the worst reading for a quarterly result since the first quarter of 1982.

The GDP accounts are organized in four main components--consumer spending, investment spending, government spending, and net exports. There were significant stories in all four of these components in the fourth quarter. Within consumer spending, outlays on durable goods--cars, appliances, furniture, and the like--are always good to watch from a cyclical economic perspective. In the fourth quarter, real (inflation-adjusted) spending on durable goods fell at a 22% annualized clip, faster than the 15% rate posted in the third quarter. Over the last four quarters, spending in this category has fallen at the fastest rate since 1951. This morning, the Commerce Department reported that consumer spending continued to decline in December.

The investment category includes three main elements worth paying attention to--business fixed investment, residential fixed investment, and inventory investment. Inventory growth contributed positively to real GDP in the fourth quarter, but a significant retrenchment in industrial output late in the fourth quarter and into January suggests that such a positive contribution may not be developing in the first quarter of 2009. Business fixed investment in structures and equipment declined sharply in the fourth quarter, while residential fixed investment (housing construction) fell for the 12th consecutive quarter.

Government spending continued to grow in the fourth quarter, although the "state and local" expenditure line fell for the second time in the last four quarters. Spending in this category may be worth watching more closely in coming quarters for signs of greater stress in state and municipal finances with the weak economy.

As noted above, "real" GDP reflects nominal spending, adjusted for estimates of price changes, throughout the national accounts. In the fourth quarter, we had a noteworthy development there as well. The "chain-weighted price index" for GDP--the overall price index for the GDP accounts--actually fell, and for the first time in a quarter since 1950.

Other reports that came out last week included some early reads on activity in January, including the Chicago purchasing manager survey, which showed the weakest reading on Midwest manufacturing activity since March 1982. Nationally, the Institute for Supply Management reports January results for its manufacturing index on Monday, and its nonmanufacturing index on Wednesday (these are both purchasing manager surveys as well).

This Week
We get some more reads on January this week, including motor vehicle sales reports for January and personal income and spending in January. One factor coloring the data for January is worse weather than normal, and some weakness in the seasonally adjusted data is to be expected.

The housing area will provide some of the most important results in coming weeks, and this week we have the National Association of Realtors' Pending Home Sales index (reported Tuesday) and the Mortgage Bankers Association weekly report on mortgage applications (coming out Wednesday). Anecdotal reports suggest we may have had some firming in recent weeks in housing activity and car sales, and we will see if this shows up in the aggregate reports.

Finally, we have an important week ahead for employment data. Both the ISM surveys (manufacturing and nonmanufacturing) include employment components, and other employment reports will include the weekly initial claims for unemployment insurance release on Thursday and a smattering of branded private reports like the Monster.com report on online help-wanted ads. But the big news of the week will come on Friday, in the national employment report for January.