The Bureau of Economic Analysis (BEA) today released its first estimates for growth in the fourth quarter of 2004. According to the BEA, the economy expanded by 3.1 percent in the fourth quarter, down from 4.0 percent in the third quarter. The growth figures for the third quarter were also revised downward slightly.
Today's figures cast doubt on the sustainability of the recovery, especially since consumer spending on homes and other items weakened. The residential housing market had its weakest showing in three years with a gain of merely 0.3 percent. Thus, the slowdown in refinancing activity following higher interest rates earlier in 2004 eventually took a toll on families' spending on new homes and renovations.
Much of the economic expansion of the fourth quarter rested, once again, on consumption spending, which grew by 4.6 percent in the fourth quarter, below the 5.1 percent increase of the third quarter. Given the continued weak labor market, it is unclear how much longer private consumption can be the primary driving force of the economy. According to recently released data from the Bureau of Labor Statistics, inflation adjusted hourly wages fell by an annualized rate of 1.0 percent in the fourth quarter.
As consumers slowed their spending, other trouble spots expanded or remained. For instance, the trade deficit continued to expand. Exports declined by 3.9 percent, while imports rose by a solid 9.1 percent. The decline in exports was the largest in three years. The trade deficit soared to a record 5.7 percent in the fourth quarter. The rising trade deficit continues to hamper a recovery in the U.S. manufacturing sector and it widens the net debt that the United States owes to the rest of the world.
Business investment continued to grow with an increase of 10.3 percent, up from 13.0 percent in the third quarter. However, as in previous quarters, much of the growth in business investment was concentrated in a narrow area of IT investment. Specifically, computers in peripherals alone accounted for 13 percent of growth in the fourth quarter. Software contributed another 9 percent to the growth rate. Changes in other areas were either negative or small. Hence, business investment stays very narrowly focused.
In addition, build ups in private inventories constituted 14 percent of growth in the fourth quarter. It is possible that this reflects fewer than expected sales in the fourth quarter.
Today's figures show that areas that have carried the economy forward in recent years are weakening and that trouble spots remain and are even expanding. This does not bode well for the economic future, unless the labor market sees a stronger recovery.
Christian E. Weller is senior economist at the Center for American Progress.