Alarming GDP Growth Figures: Housing Crisis Puts Economy on the Skids
It’s now official. The Bureau of Economic Analysis today released its estimates for economic growth in the fourth quarter of 2007, which show that the U.S. economy expanded by an annualized rate of only 0.6 percent in the months between September and December 2007—largely due to the an accelerated decline in the housing market and substantially less export growth than in previous quarters.
Economic growth slowed sharply in the fourth quarter in particular but also throughout 2007, according to the data. U.S. Gross Domestic Product in the fourth quarter of 2007 grew at the slowest pace since the first quarter of 2007, which essentially means that growth was slow throughout much of 2007. In fact, the economy expanded by 2.2 percent in 2007 relative to 2006, marking the lowest economic growth rate since 2002, and marking the third year in a row of shrinking economic growth.
Not surprisingly, the primary culprit for this slowdown is the residential housing market, though slower spending over 2007 by consumers, the federal government, and by businesses didn’t help matters. Spending on new homes and home renovations dropped by an annualized rate of 23.9 percent—the largest drop in this sector since the fourth quarter of 1981. This is also the first time since the first quarter of 1975 that activity in this sector fell for eight quarters in a row.
The troubles in the housing market seem to have translated into slower consumer spending. Consumption spending grew by only 2.0 percent in the fourth quarter, down from 2.8 percent in the third quarter. As a result, consumer spending in 2007 was 2.9 percent greater than in 2006, the smallest annual increase since 2003.
Importantly, the slowdown in consumer spending came at a time when families saved less than before and should have had more resources available for consumption. The personal saving rate dropped to 0.2 percent in the fourth quarter of 2007—the lowest level since the third quarter of 2006.
This reflects a substantial slowdown in the growth rate of personal disposable income. In the fourth quarter of 2007, inflation-adjusted disposable income increased by 0.3 percent, down from 4.5 percent in the third quarter.
Other sectors of the economy also showed signs of slowing growth rates, although the changes were much more subtle. For instance, government spending growth fell for the second time in a row, increasing by only 2.6 percent, down from 3.8 percent in the third quarter. This was largely a result of the fact that federal government spending was almost flat since it rose only by an annualized 0.3 percent, after expanding 7.1 percent in the third quarter.
In comparison, state and local government spending rose faster in the fourth quarter of 2007 with 4.0 percent than in the third quarter, when it expanded by 1.9 percent. But that trend, too, could abate as tax revenues from local property taxes decline sharply amid falling home prices.
Business investment spending also grew at a slower pace than before. Spending on offices, manufacturing plants, and other structures rose by a substantial 15.8 percent, but that was still slower than in the previous two quarters. Also, business investment spending on computers, software, and other equipment grew by 3.8 percent in the fourth quarter, again slower in the preceding two quarters.
More troublesome, though, is the sharp drop in export growth. In particular, much of the hope of a resurgence in economic growth in the coming quarters rests on the lower value of the dollar and strong growth overseas, both of which were expected to boost U.S. exports. In the fourth quarter of 2007, however, exports increased by only 3.9 percent, down from 19.1 percent in the third quarter.
Admittedly, changes in exports can be very volatile. One weak quarter may not make a trend. But it is certainly something to keep a close eye on. If export growth doesn’t rebound, then there will be few sources for stronger economic growth left going forward.
The silver lining on the international trade front, though, is that import growth also slowed substantially. Imports increased by just 0.3 percent in the fourth quarter, down from 4.4 percent in the third quarter.
Because imports, though, are still much larger than exports, the larger slowdown in export growth than in import growth meant that the trade deficit widened again relative to the economy. The difference between exports and imports amounted to 5.2 percent of GDP in the fourth quarter, up from 5.0 percent in the third quarter.
Today’s economic growth figures show a broad-based slowdown for the U.S. economy. The troubles in the housing market have accelerated and spilled over into smaller increases in consumer spending. At the same time, the demand for U.S. products and services in overseas markets has grown much slower, too.
Going forward, businesses could curtail their investment spending as demand for their products domestically and internationally wane. Government policymakers need to quickly craft suitable remedies to boost domestic demand, as these latest GDP figures indicate that an economic stimulus package will be needed to get the economy back on track in the short run.
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