Economy and Environment and Government and Media & Marketing

ECONOMIC ANALYSIS:

February 6, 2006

You can tell that economists as a group don't have a marketing bone in their bodies. How else can you explain the incomprehensible name we've given the measure of economic activity we watch more closely than any other? Gross domestic product. If I were a comedian, I could probably do a sketch on what images those words conjure up.

But I'm an economist, so there's little chance of that. Instead, like the rest of my brood, I am diving into the details of the data to get a read on what kind of shape the national economy is in.

For almost four years running, it's been tough getting people excited about GDP, for one simple reason. With the one or two individual quarters, the GDP data have presented a very upbeat picture of the economy, even as other, more easily understood economic indicators-such as job growth-were heading in the other direction.

Even now, with most indicators swinging positive, some have voiced the opinion that GDP growth in the national economy really doesn't matter so much for Indiana businesses and workers.

That thinking may soon be exception of

put to the test. According to the Bureau of Economic Analysis, the national economy hit a speed bump in the fourth quarter of 2005, closing out the year with a surprisingly weak 1.1-percent annual rate of growth for the last three months of the year. Weakness in consumer spending, the winding down of the home construction binge, and a contraction in federal government spending all contributed to the worst overall performance for the national economy in three years.

Does that matter for Indiana? Of course it does. Our households, businesses and governments operate in the national economic environment. The strength of orders for our products or demands for our services, not to mention key factors like prices and interest rates, are largely determined by national economic activity.

But some pieces of the national economic pie are more relevant than others. And what's troubling about the most recent GDP report is that the more closely you examine it, the worse it looks for our state.

If there's any one aspect of the fourthquarter 2005 U.S. economy that stands out in the data, it is the weakness in consumer spending. When it came to buying durable goods in the last three months of the year, many of us sat on our hands. The 17.5-percent decline in durables spending was the largest single-quarter decline in more than 15 years. Much of that was due to slumping motor vehicle sales, which is not good news for Indiana.

Less dramatic, but no less important for Indiana businesses, was the deceleration in business spending on capital goods nationwide. During the final three months of last year, businesses managed to spend only 2.8 percent more on non-residential fixed investment, after growing at a 9-percent clip for the first three quarters of the year. This is the first real sign that the year-and-a-halfold period of super-heated earnings propelling twofisted spending by businesses is coming to an end.

That's sobering news for those Indiana businesses that have been on the receiving end of those orders. But it's not entirely unexpected. In a mature economy like ours, expansions in capacity that periods of robust business propel these spending tend to burn themselves out as growth targets are achieved.

And the overall U.S. economy is probably stronger than the fourth-quarter GDP data portray it. No one expects federal defense spending, which fell 13.1 percent, to continue in free fall, and data revisions to trade and inventories always hold the potential to recast the numbers in the next few months. But if we're not skating on thin ice yet, it's not as thick as we thought it was.



Barkey is an economist and director of economic and policy study at the College of Business, Ball State University. His column appears weekly. He can be reached by e-mail at pbarkey@ibj.com.
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