GDP = Going Downhill Precipitously

In the 4th quarter, US real GDP fell at a seasonally adjusted annual rate of 6.2%, a far worse showing than the initial estimate of a 3.8% decline. This follows a 0.5% decline in the 3rd quarter. This is the worst showing since the 3rd quarter of 1982. Nominal GDP fell at an annualized rate of 5.8% - the worst decline since the government started releasing GDP on a quarterly basis back in 1947.

Since different parts of GDP are of very different sizes, the analysis below is based on the number of points of growth the category added or subtracted from GDP, rather than the percentage change, unless otherwise noted. The graph below shows the year-over-year change in both real and nominal GDP, and reflects the positive growth in the first half of 2008. It thus does not look quite as ugly as the 4th quarter numbers do on their own.

The biggest drag on GDP was Personal Consumption Expenditures (PCE), otherwise known as consumer spending. That subtracted 3.01 points from growth — worse than the 2.75% drag it exerted on the 3rd quarter. PCE has 3 sub-categories; spending on Durable Goods — like cars and furniture — subtracted 1.67 points, mostly due to a 1.13 point drag from autos.

Non-Durable goods spending also fell, subtracting 1.95 points, following a 1.57 point drag in the 3rd quarter. Surprisingly, most of this drag came from lower spending on food, which subtracted 1.53 points following a 0.75 point drag in the 3rd quarter. You know things are tough when the fall in spending on food has almost as much of a negative impact on the economy as spending on autos.

Some of that is likely from people going out to eat at restaurants less and eating at home more, and also from people trading down to the generic store brands from the more expensive name brands. This is not good news for the Restaurant chains - especially, I suspect, the mid-range firms like Darden (NYSE:DRI) and Brinker (NYSE:EAT).

Let us hope that it is not from lots of people going hungry, although some of it probably is. The decline in food spending was offset somewhat by a 0.28 point addition from increased spending on gasoline and other energy. This is a reversal of 6-straight quarters where energy spending was a drag on GDP growth, including a 0.45% drag in the 3rd quarter. This is not something to be very happy about.

Spending on the 3rd sub-category of PCE, Services, actually added to GDP by 0.61 points, reversing a minor 0.03 point drag in the 3rd quarter. The biggest contributors in this area were increased spending on Health Care and on Electricity & Natural Gas. Again, not areas that indicate much increase in the well-being but rather the relentless rise in the cost of health care and some rebound in energy costs (and colder-than-normal temperatures) in the 4th quarter after energy prices collapsed in the 3rd quarter.

The next big part of GDP is Gross Private Investment (GPI). The Residential Investment (RI) sub-category, mostly new housing, subtracted 0.78 points from growth in the 4th quarter, following a 0.60 drag in the 3rd quarter. This marks the 12th-straight quarter that residential investment has been a drag on GDP. The size of the drag is somewhat surprising given that it has shrunk to just 3.09% of the overall GDP — down from 4.07% in the 4th quarter of 2007.

Given the decline in both the housing starts and the building permits data, look for RI to continue to be a drag on GDP. In some senses, this is a good thing, since the huge inventory of empty houses needs to be cleared out before the housing market can regain its footing. Building more new houses now is economic stupidity. When you find yourself in a hole, stop digging (new foundations).

Non-Residential Investment (NRI) is broadly broken down into 2 parts — spending on structures like office buildings and shopping malls, and spending on Equipment and Software (E&S). Overall, NRI subtracted 2.48 points following a 0.19 point drag in the 3rd quarter.  Spending on Non-residential structures was a drag of 0.24 points in the 4th quarter, a reversal of the 0.36 point addition to growth in the 3rd quarter.

This is the first time that non-residential structures has been a drag on growth since the 3rd quarter of 2005. It will, however, not be the last. We know that Architectural billings fell off a cliff in 2008, and if Architects were not busy in 2008, then it is a lead-pipe cinch that Construction workers will not be busy in 2009.

The real swing however in NRI came from E&S, which subtracted 2.24 points from growth, a dramatic deterioration from the 0.19 point drag it exerted in the 3rd quarter. Within this category, the biggest drags were in Computers and Software, which subtracted 0.97 points, which is not good news for firms like Intel (NASDAQ:INTC) and Microsoft (NASDAQ:MSFT), and in transportation equipment, which subtracted 0.76 points. This indicates very weak demand for companies like Paccar (NASDAQ:PCAR).

Both Imports and Exports fell. Declining imports add to GDP, while declining exports hurt GDP. The decline in exports subtracted 3.44 points from growth, with more than all of that due to a decline in the export of goods, which subtracted 3.58 points, which was slightly offset by increased exports of services which added 0.14 growth points.

In the 3rd quarter, increasing exports added 0.40 growth points, and in the 2nd quarter exports were booming — adding 1.54 points to growth. Declining imports were the biggest saving grace for the economy in the 4th quarter, adding 2.99 growth points following a 0.65 addition in the 3rd quarter. Overall, then, net exports were a 0.46 point drag in the 4th quarter, reversing contributions of 1.05 points in the 3rd quarter and 2.93 points in the 2nd quarter.

Government Spending helped cushion the decline in the economy a little bit in the 4th quarter, adding 0.32 points to growth, but this was way down from the 1.14 point contribution in the 3rd quarter. Within that, Federal spending added 0.50 points to growth, split 0.16 point contribution from defense spending and a 0.34 point contribution from non-defense spending.

In the 3rd quarter defense added 0.85 points and non-defense added 0.12 points. State and Local spending subtracted 0.18 points in the 4th quarter, reversing a 0.17 point contribution in the 3rd quarter.

Look for Federal spending to be a much bigger contribution in 2009, while State and local spending will most likely continue to be a drag.

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