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Economic Growth Slows During Fourth Quarter
Monday, February 3, 2014 5:55 AM

In its initial estimate of fourth quarter GDP, the Commerce Department reports economic growth slowed to +3.2 percent during the final three months of 2013, following a +4.1 percent gain during the previous quarter.

The slowdown reflected a deceleration in private inventory investment, a decline in residential fixed investment and a larger decrease in government spending. These declines were offset by a +3.3 percent increase in consumer spending and greater net exports.

Influenced by second half expansion, economic growth expanded at a +2.7 percent pace in 2013, compared with +1.9 percent in 2012. This is somewhat misleading in that consumer spending, which is generally two-thirds of the GDP and fundamental to credit union loan demand, increased a milder +2.3 percent, compared with +2.1 percent in 2012.

The report suggests inflation remains under control, rising only 1.3 percent last quarter compared with a 2.0 percent increase in the third quarter. The core price index eased to +1.7 percent, following a +1.9 percent rise during the previous three months.

Other key indicators:

  • Pending Home Sales Plunged 8.7 percent in December with all four regions reporting declines.
  • FOMC Announcement – Reducing its monthly asset purchases by another $10 billion to $65 billion. Little change in policy language other than cited "economic activity is expanding at a moderate pace."

Brian Turner, director and chief strategist with Catalyst Strategic Solutions, says the initial report on fourth quarter GDP is encouraging; however, it is still too early to expect a steady upward trend in economic growth going forward.

“Consumer spending did improve during the last three months of 2013 and inflation remains in check, which generally helps to preserve consumer purchasing power,” says Turner. “But the absence of spending growth even as the pace of inflation declines ("disinflation") is starting to raise fears of deflation (when the inflation rate turns negative).”

Whereas disinflation can increase the purchasing power of money to some extent, according to Tuner, it also raises the ultimate cost of debt. When deflationary conditions exist, lower prices amidst lower production and demand could lead to lower wages and even less demand, and subsequently, further price declines. This is commonly referred to as the "deflationary spiral."

“Obviously, credit union loan originations would not fare well under these circumstances,” says Turner.

Historically, there has been only one period of deflation since 1948 – a short-lived, two month occasion in 2008 when consumer prices fell -1.0 percent and -1.7 percent, respectively in November and December of that year. Whereas the Federal Reserve has already dropped its overnight target rate near-zero, there appears to be just enough demand still present in the market to keep us from diving into a spiral.