Here's something to try the next time you find yourself mingling with your friends at a party. Strike up a conversation about GDP.
You know, GDP. Gross Domestic Product? It's the total output of everything we produce in the economy.
Oh, well, never mind.
But even if it's generally true that talk of GDP's ups and downs elicits blank stares, some of us devour the news. That's because the speed-up and slowdown of overall economic growth can affect the policies of our chief economic watchdog, the Federal Reserve Bank. And those policies can have a powerful effect on the economy.
That's why the news that the U.S. economy grew at a fairly restrained rate of 3.1 percent in the final quarter of 2004 has been greeted so warmly by some analysts. The gradual slowdown in GDP growth at the end of the year, as reported by the Bureau of Economic Analysis, is exactly in line with what the Fed's policy of gradual interest rate increases has been trying to accomplish.
But, truth be told, it's been luck more than skill that brought the economic throttle down so smoothly. Spending by consumers and businesses continues to be strong and, were it not for a surprisingly weak performance in the trade sector, growth would have been much stronger. With short-term interest rates still lingering well below their historical averages, it's a sure bet there will be no interruption in our monthly servings of interest rate increases, at least for the near future.
Overall consumer spending growth slowed only slightly in the fourth quarter in the national economy, to a 4.6-percent annual rate, according to the BEA. Spending on durable goods remained particularly strong, although its 6.7-percent growth was down substantially from the meteoric 17.2-percent spending growth realized in the third quarter of last year.
And consumers showed an increasing appetite for imported goods in the year's final quarter. The 9.1-percent rise in imports in the October-December period is surprising given continued declines in the dollar that have tended to make foreign-produced goods more expensive. This also shows up in inflation, as measured by the price deflator for consumer spending, which pushed up to 2.5 percent during the last three months of the year.
The sudden turnabout in exports was just as surprising. A cheaper price tag on U.S. goods sold abroad didn't halt a 3.9-percent decline in goods and services sent to other countries during the October-December period last year. That decline ended a fivequarter streak of rising exports that has been a key ingredient to overall growth.
The dismal trade performance of the U.S. economy makes it clear the "selfcorrecting" problem of trade imbalances between the United States and the rest of the world is getting worse, not better. The best we can hope is that revisions to the data, produced as more complete information becomes available, will paint a less gloomy picture.
For Midwest states like Indiana, the GDP report continues to give reason for cheer. Business spending on plants and equipment, vital to the fortunes of so many companies here, continues to grow at double-digit rates. And while continued strong spending by consumers on durables may worry those at the Fed concerned about inflation, it is welcome news to Indiana's manufacturing sector.
A larger concern is the future direction of Federal Reserve policy. Low saving rates and two-fisted spending by consumers and businesses alike are pushing up prices faster than some at the central bank would like. And, despite hitting its growth target in the fourth quarter of 2004, the possibility of more aggressive interest-rate hikes as the new year unfolds is stronger than ever.
Barkey is an economist and director of economic and policy studies at the College of Business, Ball State University. His column appears weekly. He can be reached by e-mail at email@example.com.