4th Quarter GDP and Compensation

by Zach Bethune, Thomas Cooley and Peter Rupert

GDP Report
The BEA’s advance estimate of GDP  for the 4th quarter shows a 2.6% increase in real GDP, sharply lower than the 4- 5.0% rises for the 2nd and 3rd quarter. This was below prior estimates and was largely taken by the markets as negative overall. Personal consumption expenditures led the positive side of things, growing at 4.3%, making it the largest contributor to growth. Exports and private nonresidential fixed investment also contributed to the growth. Working against that growth was an increase in imports, growing 8.9%, contributing -1.39 percentage points to the growth. Government spending also saw a large decline.

Although the growth was below the prior quarters, the economy increased at a rate of 2.5% over the prior year.  This continues to be respectable recovery although not as fast as many prior rebounds.  The open question is whether the moderation of the rebound reflects the drag created by the stagnant European and Japanese Economies and the slowing of the BRICS.  The strengthening of the dollar will begin to take a toll on exports over the coming quarters so it remains to be seen if the recovery can pick up any momentum.

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Labor Markets

Also out today is the Employment Cost Index from the BLS. The ECI for all civilian workers increased 0.6% in the 4th quarter. Wages and salaries (70% of compensation) rose 0.5% while benefits (30% of compensation) increased 0.6%. Plaguing some policy makers is the weak response of compensation of employees; however, some are less concerned. From the FOMC minutes of the December meeting:

Although a few participants suggested that the recent uptick in the employment cost index or average hourly earnings could be a tentative sign of an upturn in wage growth, most participants saw no clear evidence of a broad-based acceleration in wages. A couple of participants, however, pointing to the weak statistical relationship between wage inflation and labor market conditions, suggested that the pace of wage inflation was providing relatively little information about the degree of labor underutilization.

Further, they see the recent decline in energy prices as helpful in supporting consumption growth. From Wednesday’s FOMC statement (emphasis added):

Information received since the Federal Open Market Committee met in December suggests that economic activity has been expanding at a solid pace.  Labor market conditions have improved further, with strong job gains and a lower unemployment rate.  On balance, a range of labor market indicators suggests that underutilization of labor resources continues to diminish.  Household spending is rising moderately; recent declines in energy prices have boosted household purchasing power.

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