Taking Apart the Tainted GDP Data

Residential Investment

Another negative in the report is the sobering figure on residential spending, which subtracted 1.2 points from GDP and fell for a fifth consecutive quarter, by 19.2%. That follows decreases of 18.7% in the third quarter and 11.1% in the second quarter. The fourth-quarter decline was the highest since 1991, but seems likely to be the nadir for the cycle. Nevertheless, the decline is large enough to make clear that significant downside risks to the economy remain because of weakness in the housing sector.

Government Spending

The bear camp will surely note the relatively large contribution from the government sector, where spending increased 3.7%. The federal government led the way with a 4.5% gain in spending, which was boosted by an 11.9% gain in spending on national defense. State and local spending increased 3.3%. Overall, the government sector added seven-tenths of a percentage point to the fourth-quarter GDP gain.

The contribution should not be entirely dismissed, however, as it is likely to remain a feature throughout 2007 because of favorable budget situations at the federal, state and local levels. For example, the National Governors Association is forecasting nominal state spending to increase at a 7% clip in 2007, comfortably above its 30-year average of 6.4%.

Personal Spending

A negative that isn't so readily apparent in the headlines relates to the pace of personal spending. On the surface, the figure looks solid, increasing 4.4%. The problem, however, is that it reflects a gain of just 3.6% in nominal spending because the personal consumption deflator fell 0.8%, its first decrease since 1961 and the largest decline since 1954, according to Market News.