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Weak U.S. data fails to dim memories of the recession


The U.S. economy grew at an annual rate of 3 per cent in the fourth quarter, according to the Commerce Department's third and final estimate. That was the fastest pace since the first half of 2010. Unfortunately, that could be as good as it gets for the recovery.

Few economists expect the fourth-quarter pace to last. Royal Bank of Canada expects growth of 2.4 per cent in the first quarter; Barclays Capital foresees growth of 2.1 per cent. As U.S. Federal Reserve chairman Ben Bernanke explained this week, that's not fast enough to put a dent in unemployment.

Thursday's report on gross domestic product shows why economic growth likely will slow.

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Exports were weaker than previously thought, as trade subtracted 0.3 percentage points from GDP, compared with a negligible drag of 0.1 percentage points in the previous estimate. With Europe in recession and China's red-hot economy cooling to a more sustainable pace, it will be difficult for U.S. exporters to boost trade in the months ahead.

Inventories accounted for much of the increase in GDP at the end of last year. It's unlikely that will be repeated in the first quarter. "Historically, a quarter in which inventory investment makes a significant growth contribution is typically followed by quarter in which that growth contribution is modest or even negative," New York Fed President William Dudley said last week. "That appears to be what is shaping up for the first quarter this year."

The biggest blow to growth in the fourth quarter was a 4.2 per cent drop in government spending. That could represent a trough, but the U.S.'s debt-ridden governments won't be making significant contributions to the economy for some time. And finally, corporate profits slipped. Company earnings grew 0.9 per cent from the third quarter, the smallest increase since the fourth quarter of 2008. That suggests companies will have less money for investment and hiring.

There were positives in the report. Business investment was stronger than previously observed, and consumer spending held up. Inflation was tame. Those data points show that the U.S. is safe from another recession. But they aren't strong enough to dim memories of the last one.

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About the Author
Senior fellow at the Centre for International Governance Innovation

Kevin Carmichael is a senior fellow at the Centre for International Governance Innovation, based in Mumbai.Previously, he was Report on Business's correspondent in Washington. He has covered finance and economics for a decade, mostly as a reporter with Bloomberg News in Ottawa and Washington. A native of New Brunswick's Upper St. More

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