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The 0.7% gain in real gross domestic product (GDP) in the fourth quarter, with a 1.8% chain price index, was almost exactly as MMS International expected. The report shows the economy slowed from a healthy 4% rate in the third quarter. For all of 2002, the economy grew at a 2.4% annual rate, vs. the slight 0.3% rise in GDP in 2001.
Yet, the component mix of fourth-quarter GDP growth provided some surprises, and most of these forecast errors bode well for forecasts of more rapid growth in the first and second quarters.
Business inventories subtracted a hefty $15.5 billion from fourth-quarter growth, which leaves substantial room for either an upward fourth-quarter revision in the coming two reports, or a solid inventory rebound in the first quarter.
Consumption growth slowed even more than we expected, to a 1.0% rate, due to a sharp slowing in service consumption to a 1.3% rate, though this component often exhibits a "saw-tooth" pattern, and weakness may well reflect the mild start to this winter.
Alternatively, real equipment and software spending posted a surprisingly strong 5% growth rate in the fourth quarter, vs. our estimate of a 3% rate of decline.
And government spending extended its pattern of robust growth with a 4.6% fourth-quarter real rate, with unexpected strength in the nondefense component.
In total, the fourth-quarter data did reveal the slowdown we at MMS expected, but the shift in composition toward final sales -- which grew at a 1.3% rate -- and lean inventories, bode well for our 3.7% growth estimates for the first and second quarters.
Employment Costs Rise
The fourth-quarter employment cost index (ECI) rose 0.7%, which corresponded to a year-over-year gain of only 3.4%. The data were much lower than expected, with the unexpected weakness captured primarily in the wages and salaries (W&S) component.
The 0.4% gain in the W&S matches the lowest quarterly rate of growth in the history of the series (back to 1982), which suggests that the economic "soft spot" and lingering weakness in corporate profitability continue to damp inflationary pressure on this front. The quarterly gain left the W&S component rising at only 2.9% on a year-over-year basis, which marks the lowest growth rate in seven years.
This contrasts to the 1.3% quarterly increase in benefit costs, which was in line with quarterly increases over the past four years and left the year-over-year figure rising 5.0%. Since 1999, benefit costs for civilian workers have increased about 20%, double the pace for 1995 to 1998. Much of the increase in benefit costs over the past few years stemmed from rising costs for health insurance and retirement plans.
On net, the data suggest that underlying inflation will remain subdued in 2003, provide some downside risk for nominal consumption, while profit margins should find some support from the ongoing deceleration in compensation costs.
From MMS International, wire reports
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