The Commerce Department reported today on the growth in the economy for the fourth quarter of 2011. According to the report, there was growth at the rate of 2.8 percent during the last quarter of 2011. This is the headline that much of the media is touting since this growth rate is up from the 1.8% rate of growth during the third quarter. It sounds like a nice improvement at first glance, but on close inspection it is actually quite troubling. Here's why:
1) The figures released are not the final numbers for growth for the quarter. They may change dramatically. Remember that the third quarter figures were first released at 2.5%, then revised down to 2.0% and revised again to 1.8%.
2) Almost all of the growth came from an increase in the levels of inventory. Without inventory growth included, GDP grew at the annual rate of 0.8% during the quarter. Some of the slower growth during the third quarter was the result of inventory reductions, so it is only normal that during the fourth quarter the levels of inventory would go back up. The point, however, is that the inventory effects are transitory. Moving forward, there will not be a continuing inventory buildup. That means that we are moving into the first quarter of 2012 with a base rate much closer to 0.8% than the 2.8% in today's report.
3) Business spending on capital goods also slowed during the quarter to the lowest level in three years. This is another bad sign for the future. Of all the things that indicate future growth prospects, it is business investment that most clearly shows which way the economy is heading. Another quarter of low investment will most likely mean that the second half of 2012 will see a serious slowdown.
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