Fourth quarter GDP growth slows sharply

The Commerce Department reported sharply lower real economic growth during the fourth quarter of 2007 - a seasonally adjusted annualized rate of just 0.6 percent.
This figure was well below consensus estimates of 1.2 percent and, for the entire year of 2007, the economy expanded just 2.2 percent, the lowest rate of growth since 2002.

Note that this is the "advance" estimate for fourth quarter growth - the first of three estimates to be followed by the "preliminary" and "final" readings in February and March.

Housing continued to weigh on the economy posting its steepest quarterly decline in 26 years, plunging 24 percent. Residential investment alone subtracted 1.18 percentage points from growth, however, even more significant was the 1.25 percentage point subtraction due to declining inventories. Note that large changes in inventories have been "revised away" on a number of occasions in recent years.

Both residential investment and inventories are in the Private domestic investment category that subtracted a whopping 1.64 percentage points to fourth quarter growth as shown in the chart below.
Consumer spending, which accounts for more than two-thirds of economic activity, contributed just 1.37 percentage points to the bottom line, down from a 2.01 contribution in the third quarter and well below the average contribution of 2.2 percent over the last five years.

The price index for personal consumption expenditures, used to convert nominal GDP growth into real GDP growth, rose at an annual rate of 3.9 percent after increasing an upwardly revised 1.8 percent during the third quarter.

Overall, this report is worse than expected, but it has the potential to be revised upward in the months ahead due to the relatively large decline in inventories.