Inventory Accumulation Boosts Real GDP Growth in the Fourth Quarter – AIER



Real gross domestic product increased at a 6.9 percent annualized rate in the fourth quarter, up from a 2.3 percent pace in the third quarter. Over the past four quarters, real gross domestic product is up 5.5 percent, putting the level slightly above trend (see first chart).

Real final sales to private domestic purchasers, a key measure of private domestic demand, rose at a more modest 2.8 percent annualized rate in the fourth quarter following a 1.4 percent pace in the third quarter. Over the last four quarters, real final sales to private domestic purchasers are up 6.4 percent, keeping the level slightly above trend (see first chart). The trend growth in real final sales to private domestic purchasers is 2.6 percent since mid-2009.

Among the components, real consumer spending overall rose at a 3.3 percent annualized rate, beating the 2.0 percent rate in the third quarter, and contributing a total of 2.25 percentage points to real GDP growth. Consumer services led the growth in overall consumer spending, posting a 4.7 percent annualized rate, adding 2.12 percentage points to total growth while durable-goods spending rose at a 1.6 percent pace, contributing 0.14 percentage points. However, nondurable-goods spending fell at a -0.1 percent pace, subtracting 0.02 percentage points and (see second and third charts). Within consumer services, spending was particularly strong on transportation services and recreation services.

Business fixed investment increased at an 2.0 percent annualized rate in the fourth quarter of 2021, contributing 0.28 percentage points to final growth. That gain was led by a 10.6 percent jump in intellectual-property investment (adding 0.53 points to growth) and a 0.8 percent gain in spending on equipment (adding 0.05 percentage points). Those gains were partially offset by a decline in spending on business structures where spending fell at an 11.4 percent rate, the third decline in a row, and subtracting 0.30 percentage points from final growth.

Residential investment, or housing, fell at a 0.8 percent annual rate in the fourth quarter compared to a 7.7 annualized drop in the prior quarter. The fourth quarter was the third decline in a row. The drop in the fourth quarter reduced overall growth by 0.03 percentage points (see second and third charts).

Businesses added to inventory at a $173.5 billion annual rate (in real terms) in the fourth quarter versus liquidation at a $66.8 billion rate in the fourth quarter, adding a whopping 4.9 percentage points to fourth-quarter growth (see third chart). The inventory accumulation helped boost the real nonfarm inventory to real final sales of goods and structures ratio to 3.87 from 3.80 in the third quarter and 3.75 in the second quarter.  This is still below the 4.3 average for the 10 years through 2019 (see fourth chart).

Exports rose at a 24.5 percent pace while imports rose at a 17.7 percent rate. Since imports count as a negative in the calculation of gross domestic product, a gain in imports is a negative for GDP growth, subtracting 2.43 percentage points. The rise in exports added 2.43 percentage points. Net trade, as used in the calculation of gross domestic product, had a negligible impact on overall growth.

Government spending fell at a 2.9 percent annualized rate in the fourth quarter compared to a 0.9 percent pace of growth in the third quarter, subtracting 0.51 percentage points from growth.

Consumer price measures also showed a rise in the fourth quarter. The personal-consumption price index rose at a 6.5 percent annualized rate, up from a 5.3 percent pace in the third quarter. From a year ago, the index is up 5.5 percent. Excluding the volatile food and energy categories, the core PCE (personal consumption expenditures) index rose at a 4.9 percent pace versus a 4.6 percent increase in the third quarter. From a year ago, the core PCE index is up 4.6 percent.

Lingering materials shortages, labor constraints, and logistical problems are sustaining upward pressure on prices. However, there are some signs that some bottlenecks may be starting to ease. Furthermore, the Federal Reserve is moving to hike interest rates, likely starting in March, and planning on taking actions to reduce its holding of fixed income securities. These measures should lead to higher short-term and long-term interest rates, thereby reducing demand and eventually loosening the labor market, all of which should ease upward pressure on prices.

The outlook is for continued economic growth, but history suggests that the risk of policy mistakes rises during Fed tightening cycles. Additionally, 2022 is a Congressional election year. Intensely bitter partisanship and a deeply divided populace could lead to turmoil as confidence in election results are coming under constant attack. Contested results around the country could easily lead to government paralysis, testing the durability of democracy and the union itself.

Robert Hughes

Bob Hughes

Robert Hughes joined AIER in 2013 following more than 25 years in economic and financial markets research on Wall Street. Bob was formerly the head of Global Equity Strategy for Brown Brothers Harriman, where he developed equity investment strategy combining top-down macro analysis with bottom-up fundamentals.

Prior to BBH, Bob was a Senior Equity Strategist for State Street Global Markets, Senior Economic Strategist with Prudential Equity Group and Senior Economist and Financial Markets Analyst for Citicorp Investment Services. Bob has a MA in economics from Fordham University and a BS in business from Lehigh University.

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