The 2020 Mid-Year Economic Update_long

Latest Economic Growth Numbers Should Spur Optimism

Businesses should view increases in certain components of GDP as a green light to pursue growth opportunities.
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Editor’s Note: Bridget Strand, Ph.D., joined Modern Distribution Management and its sister company Industrial Market Information as Economist in late 2013. Read more about Strand at the bottom of this blog.

Last week the fourth quarter 2013 GDP growth data was released, and while the 3.2 percent growth may seem unspectacular and even meager, there are elements in the details that lead me to be more optimistic about the state of the overall economy and the prospects for growth. 

If you remember your intro to macroeconomics course, you will know that GDP is the sum of U.S. consumption, investment, government expenditures and net exports, or GDP = C+I+G+NX. Therefore the 3.2 percent growth represents the change from the preceding period for these elements.

Looking more closely at these components yields some striking differences.

Federal Government Spending
Starting with the most dramatic element in the data, federal government spending was down 12.9 percent, with much of this likely due to the 14 percent decrease in defense spending. Historically, every recovery except for the one we have just experienced was buoyed by increases in government spending and hiring.

The opposite has happened this time, which means that the private sector and consumers must not only offset the negative growth of the public sector but also create the economic growth in the country. The contribution of the overall government sector to GDP in the latest quarter was -0.93 points, and the federal contribution of -0.98 points is the largest contraction in government expenditures in over three years.

Consumption
Consumption data is a bright spot, with personal consumption increasing 3.3 percent overall – the strongest growth in over three years. Consumption of goods, both durable and nondurable, was strong, increasing 4.9 percent. Services consumption increased 2.5 percent as well, rounding out this impressive sector, which contributed 2.26 points to the GDP growth rate.

One standout for the fourth quarter was durable goods consumption, not driven by motor vehicles as one may think but rather by purchases of smaller durables and recreational goods. Durable goods consumption outpaced the nondurable goods consumption connected with holiday spending.

Investment
The next component, investment, grew at an average rate and would have been stronger if it weren’t for the -9.8 percent change in residential investment, which reversed the trend of 12 consecutive quarters of positive growth. This data will be watched closely in the next few quarters to see if this decrease was an anomaly or an overall tightening of residential investment across the country.

Net Exports
The last component was one of the most exciting (Disclaimer: Author has worked as a Ph.D. trade economist) as net exports grew 11.4 percent with exports of goods up 15 percent – the highest growth rate seen in more than four years. Net exports contributed 1.33 points to the overall GDP growth and along with consumption and investment were able to offset the -0.93 from government spending and still drive a 3.2 percent growth in the economy.

The Bottom Line for Businesses
What does this mean for 2014? This is a positive indicator of the underlying strength of the U.S. economy in the face of a dysfunctional and belt-tightening government.

Firms should see the increases in consumption, exports and investment as signals to pursue growth opportunities. As always there are many factors that affect economic growth. Nevertheless, this report illustrates increasing consumer confidence and business growth – the foundations of the U.S. economy. 

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Bridget Strand, Ph.D., is MDM and Industrial Market Information’s economist. Strand has a background in applied economic theory and international trade and development. Prior to joining MDM and IMI, Strand worked as an economist for the City and County of Denver, CO, as well as in roles in the finance sector and as a consultant with the OECD in Paris and the World Bank. Strand received a Bachelor’s Degree in Economics and Politics from New York University and her Ph.D. from the University of Colorado at Boulder with a concentration in International Trade and Investment, as well as Development Economics. She has research published in a number of journals.

To reach Bridget Strand, email bridget@imidata.com.

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