GDP Growth in the Fourth Quarter of 2012: Cuts in Government Spending Drove GDP Down

Growth of GDP and Contri of Govt, 2007Q1 to 2012Q4

BEA release of 1/30/13; Seasonally adjusted annualized rates       Percent Growth Contribution to GDP      Growth (% points)
2012Q2 2012Q3 2012Q4 2012Q2 2012Q3 2012Q4
Total GDP 1.3 3.1 -0.1 1.3 3.1 -0.1
A.  Personal Consumption Expenditure 1.5 1.6 2.2 1.06 1.12 1.52
B.  Gross Private Fixed Investment 4.5 0.9 9.7 0.56 0.12 1.19
 1.  Non-Residential Fixed Investment 3.6 -1.8 8.4 0.36 -0.19 0.83
 2.  Residential Fixed Investment 8.5 13.5 15.3 0.19 0.31 0.36
C.  Change in Private Inventories nm* nm* nm* -0.46 0.73 -1.27
D.  Net Exports nm* nm* nm* 0.23 0.38 -0.25
E.  Government -0.7 3.9 -6.6 -0.14 0.75 -1.33
Memo:  Final Sales 1.7 2.4 1.1 1.71 2.37 1.13
    nm* = not meaningful
$ Value of Change in Private Inventories (2005 prices) $41.4b $60.3b $20.0b

The Bureau of Economic Analysis of the US Department of Commerce released on January 30 its initial estimate (what it formally calls its “advance” estimate) of US GDP growth in the fourth quarter of 2012.  The result was terrible:  GDP is estimated to have declined by a slight amount (0.1% at an annual rate).  While it is possible that this estimate will be revised upwards as the second and third revisions are released next month and the month after (there has historically been an upward revision on average of 0.3% points from the advance estimate to the third, and there was a particularly large upward revision in the 2012Q3 figures between the advance and third estimates), fourth quarter growth will still likely be disappointingly low.

The primary cause of the stagnation of GDP in the fourth quarter was a sharp cut in government spending.  As shown in the table above, total government spending on goods and services (federal, state, and local) fell at an annualized 6.6% rate in the quarter.  This had the direct impact of subtracting 1.33% points from what GDP growth would otherwise have been.  But there will also be an indirect impact, as workers who would have been employed producing goods and services for government would in turn buy goods and services themselves with the salaries they would have received.  With a multiplier of just two, the impact of the cut in government spending in the fourth quarter was a subtraction of 2.66% points (2 x 1.33% points) from what growth would have been.

Most of the decline in government spending was due to a large fall in spending at the federal level, although state and local spending fell some as well.  Federal government spending fell at an annualized rate of 15%, all due to a fall in defense spending at an annualized rate of 22%.  These declines more than offset increases of an estimated 9.5% and 13% in total federal and in defense spending respectively in the third quarter, which had contributed to the relatively good GDP growth of 3.1% in that quarter.  The swings were likely due to end of the fiscal year spending (the federal fiscal year ends September 30) which was particularly sharp last year and therefore not picked up in the normal seasonal adjustment calculations.  The fall in the fourth quarter of 2012 (the first quarter of the fiscal year) reflected the continued budget uncertainty, as Congress threatens to slash the current budget drastically, either by design or through the automatic sequester cut-backs dictated as part of the agreement to get out of the debt ceiling debacle in 2011, that might be instituted soon (see below).

The fall in government spending in the fourth quarter was particularly sharp, but government spending has been falling in each quarter but two since the beginning of 2010.  The resulting fiscal drag has held back growth.  The figures are shown in the graph at the top of this blog.  The graph shows the rate of growth of GDP each quarter (in blue, at annualized rates) since the beginning of 2007, plus the direct contribution to this growth each quarter from government expenditures (in red).

Government spending rose each quarter in 2007 and 2008, the last two years of the Bush Administration, and this continued into 2009 after Obama was inaugurated.  The growth in government expenditures was particularly sharp in the second quarter of 2009 as the stimulus measures started, and this succeeded in turning around GDP.  GDP was falling at an annualized rate of 8.9% in the fourth quarter of 2008, and this carried over into the first quarter of 2009 with an annualized fall of 5.3%.  But then GDP stabilized and began to grow in the third quarter of 2009, and it has grown each quarter since until the fourth quarter of 2012.

But GDP growth since 2010 has been disappointingly modest, at rates of just 2 to 3% a year on average (with some quarterly fluctuation), as it has been dragged down by the falling government expenditures over this period.  As has been noted in earlier postings on this blog (for example here and here), the resulting fiscal drag can explain fully why this recovery has been modest in comparison to the recoveries seen in previous downturns in the US economy over the past four decades.

The other major factor explaining the stagnation of GDP in the fourth quarter was the negative contribution from inventory accumulation.  The change in private inventories led to 1.27% points being subtracted from what GDP growth otherwise would have been.  But as was explained in an Econ 101 posting on this blog, it is the change in the change in private inventory accumulation which acts to contribute to (or subtract from) GDP growth in any given period.

One sees news reports that still get this wrong, with statements such as that inventories fell by $40 billion in the fourth quarter.  This is not correct.  As noted in the table above, inventories actually grew by $20 billion in the fourth quarter.  But they grew by more (by $60 billion) in the third quarter.  That is, the change (the growth) in inventories was $60 billion in the third quarter, while the change (the growth) in inventories was again positive at $20 billion in the fourth quarter.  But while they continued to grow, they did not grow as fast as before, and the change in the change in inventories was a negative $40 billion.  This subtracted 1.27% points from GDP growth.

As was noted a year ago on this blog when the figures for GDP growth in the fourth quarter of 2011 were released, an increase in private inventory accumulation in that quarter largely explained the relatively good growth rate of that quarter.  But I argued this would then likely be reversed, with inventories not growing as fast and perhaps even declining, which would act as a drag on growth in 2012.  The 2012 figures now out show that this in fact happened, with a negative contribution of private inventory accumulation to GDP growth in the first, second, and fourth quarters.

Other than the drag from cuts in government spending and the deceleration of inventory accumulation, the other components of GDP growth in the fourth quarter of 2012 were generally quite good.  Residential fixed investment grew at an annualized rate of 15.3%, continuing the strong growth seen already in the second and third quarters.  But residential fixed investment was only 2.6% of GDP in the fourth quarter, so the rapid growth on this small base only made a contribution of 0.36% points to GDP growth in the quarter.  In contrast, government spending in the fourth quarter was 19.3% of GDP (down from 19.6% of GDP in the third quarter).  [Figures on GDP shares directly from BEA on-line GDP tables.]

Non-residential fixed investment (basically private business investment in capital and structures) also grew at a good rate in the fourth quarter, at 8.4% annualized, reversing a small decline seen in the third quarter.  And personal consumption expenditure rose at a 2.2% rate.  Since personal consumption accounts for 71% of GDP spending, this 2.2% increase contributed 1.52% points to what GDP growth would have been.

The fourth quarter GDP report therefore would have been solid, had it not been for the sharp cuts in government spending in the quarter.  Accumulation of private inventories then responds, as businesses do not want to see inventories mounting up on the shelves when they cannot be sold and scale back production (or in the fourth quarter, still increase their inventories, but not by as much as before).

The danger to the economy now is that government spending will be scaled back even further, as a Republican controlled Congress insists on slashing public expenditures.  If nothing is agreed to, then the sequesters that Congress required in August 2011 as a condition for the debt ceiling increase (so that the US would not then be forced to default) will mandate a sharp scaling back in federal government expenditures.  While the deadline for this was pushed back to March 1 from January 1 as part of the fiscal cliff agreement at the end of 2012, there is still a deadline.  The nonpartisan Center on Budget and Policy Priorities has estimated in a recent report that should the sequester enter into effect on March 1, defense spending would be cut by $42.7 billion, or 7.3%, while non-defense spending would be cut by also $42.7 billion, or 5.1% for programs included other than Medicare (Medicare would be cut by 2.0%).

Such cuts, especially if they suddenly enter into effect on March 1, would be devastating to  the economy.  Note that while federal spending already fell by 15% at an annualized rate in the fourth quarter, this fall at a quarterly rate is just 3.6%.  The sudden cuts under the sequester would be far larger.

Almost all of the participants in this budget process, both Democrat and Republican, agree that the sequester is something to be avoided.  The sequester requirement was in fact set up precisely as something both sides would want to avoid, so that agreement would be reached on some other budget plan.  But Republicans are insisting on similarly large cuts in any budget.  They simply wish that the cuts would fall more on domestic programs affecting the poor and middle classes, and less on the military.  But economically the problem for GDP growth would remain if similarly sized cuts are forced through, and would indeed be worse (in terms of the impact on GDP, even ignoring the distributional consequences) if they are re-focused on programs for the poor and middle classes.

Finally, it is worth noting that the price index figures also released by the BEA on January 30 as part of the GDP accounts still show no indication that inflation is any issue.  While conservatives have been asserting since Obama took office four years ago that high deficits resulting from his policies would lead to high inflation, that has not occurred.  The price deflator for GDP, the most broad-based index measuring inflation, grew by only 1.8% in 2012.  The price deflator for the personal consumption expenditures component of GDP (the price deflator that Alan Greenspan reportedly favored for tracking inflation) grew by a similar 1.7% in 2012.  These are both just below the target of 2% for inflation that the Federal Reserve Board favors.  (Inflation of zero is not desired by the Fed or others as it is then easy for the economy to slip into deflation, which makes management of the economy even more difficult.)

And inflation in the fourth quarter of 2012 was even less, at just 0.6% for the GDP deflator and 1.2% for the personal consumption expenditures deflator.  The prediction of both conservative economists and politicians that high deficits under Obama would lead to high inflation unless government expenditures were slashed drastically, could not have been more wrong.

GDP Growth in the First Quarter of 2012: A Slow Economy Going Slower

BEA release of 4/27/12 2011 Q3 %growth 2011 Q4 %growth 2012 Q1 %growth Contribution to GDP growth in 2011 Q4 Contribution to GDP growth in 2012 Q1
Total GDP 1.8 3.0 2.2 3.0 2.2
A.  Personal Consumption Expenditure 1.7 2.1 2.9 1.47 2.04
B.  Gross Private Fixed Investment 13.0 6.3 1.4 0.78 0.18
   1.  Non-Residential Fixed Investment 15.7 5.2 -2.1 0.53 -0.22
   2.  Residential Fixed Investment 1.3 11.6 19.1 0.25 0.40
C.  Change in Private Inventories nm* nm* nm* 1.81 0.59
D.  Net Exports nm* nm* nm* -0.26 -0.01
E.  Government -0.1 -4.2 -3.0 -0.84 -0.60
   1.  Federal Government 2.1 -6.9 -5.6 -0.58 -0.46
   2.  State and Local Government -1.6 -2.2 -1.2 -0.26 -0.14
Memo:  Final Sales 3.2 1.1 1.6 1.15 1.61
        nm* = not meaningful
$ Value of Change in Private Inventories (2005 prices) -$2.0b $52.2b $69.5b

A.  Introduction

The Bureau of Economic Analysis (BEA) of the Department of Commerce released this morning its first estimate of GDP growth in the first quarter of 2012.  The table above summarizes the key figures.  Overall, the report is disappointing.  Many observers were expecting GDP growth to accelerate, continuing the path of quarter by quarter increases seen during the course of 2011 (with growth rates of 0.4%, 1.3%, 1.8%, and 3.0%, in the first through the fourth quarters, respectively).  But readers of this blog may recall that I had warned of a real possibility of deceleration in a posting on January 27, when the BEA released its first estimate of growth in the fourth quarter of 2011.  That slowdown has happened.  So far the slowdown has been modest, and one should not put too much emphasis on one quarter’s figures.  But a deeper assessment of the numbers contained in the report suggests that growth could slow further in the next few quarters, in the period just before the Presidential election.  This is not good for Obama.

The table has a lot of numbers to give the full picture, but we will focus on a few.  The table is similar to the one I used in the January 27 posting noted above, although this time I have split out the Change in Private Inventories from other investment (i.e. from Fixed Investment), to give a clearer picture of the trends.  Note also that the figures for the fourth quarter of 2011 differ somewhat from those shown in the January 27 posting.  This is because the January figures were the initial estimates (the BEA calls them the “advance estimates”), which are then revised twice (and released in late February and then in late March).  The initial estimate for the fourth quarter of 2011 was that GDP rose by 2.8%.  Following the revised second and then third estimates (as more complete data became available), the GDP growth rate for the period is now estimated to have been 3.0%.  And there are small changes in a number of the other figures as well.  Similarly, the release today was the initial estimate for the first quarter of 2012, and revised estimates will be released in late May and then in late June, before the release in late July of the initial estimates for the second quarter.

B.  The Change in the Change in Private Inventories

It is best first to focus on what has happened to the Change in Private Inventories, as this can drive the short term dynamics of quarter to quarter GDP growth.  As was described in a posting in the Econ 101 section of this blog, it is the change in the change in private inventories which leads to a change in GDP (i.e. to GDP growth).  In the last line of the table above, I have shown what the actual (estimated) dollar value was of inventory accumulation (the change in private inventories), going back to the third quarter of 2011.  In that third quarter, the stock of inventories in fact fell a small amount, by $2.0 billion (in 2005 prices).  Inventories are then estimated to have grown by $52.2 billion in the fourth quarter, for a change in the change in private inventories of $54.4 billion.  This contributed 1.81% points of the 3.0% growth in GDP.  That is, fully 60% ( = 1.81 / 3.0 ) of the growth in the fourth quarter (based on the revised figures) is now estimated to have come from inventory accumulation.

In the first quarter of 2012, private inventories are estimated to have grown by even more than they did in the fourth quarter:  by $69.5 billion.  But even though inventory accumulation is now estimated to have been higher, the change in the change in inventories was only $17.3 billion ( = $69.5b – $52.2b).  Thus even though inventory accumulation was greater than in the fourth quarter of 2011, the contribution to the growth of GDP in the first quarter of 2012 was an estimated 0.59% points (vs. the 1.81% of the previous quarter) of the 2.2% growth, or about 27% ( = 0.59 / 2.2 ) of the growth in GDP.

Inventory accumulation thus continued to add to, rather than subtract from, overall GDP growth in the first quarter, but at a slower pace than in the fourth quarter.  Looking forward, inventory accumulation would need to grow further to $86.8 billion ( = $69.5b + $17.3b) for the change in the change in private inventories to continue at the same pace, and contribute approximately 0.6% points to growth.

But with high positive inventory growth for two quarters now, there is a good chance that producers will cut back on production so as not to add so much to inventories sitting on shelves.  If inventory accumulation even simply continues at the $69.5 billion pace of the first quarter, the change in the change in inventories will then be zero.  If all else in the economy continues to grow as it did in the first quarter (it won’t, but if it did), then the growth rate in the second quarter would be 2.2% – 0.6% points = 1.6% (which is the rate of final sales growth in the quarter; see the table above).

But inventory accumulation could be a good deal less than that.  A fall in the stock of inventories is not unusual.  From 2001Q1 through 2012Q1, for example (a period of 45 quarters), the change in private inventories was negative in 15 of the quarters (i.e. one-third of the time) and positive in 30.  Even if the change in private inventories was just zero, and not even negative, the change in the change in private inventories would then be a negative $69.5 billion from the pace in the first quarter.  This would subtract 2.4% points from GDP growth, and if all else grew at the pace it did in the first quarter, then GDP growth would be a negative 0.8% ( = 1.6% growth of final sales minus the 2.4% points).

There is a good chance, but no certainty, the pace of inventory accumulation will slow down.  If so, overall GDP growth would slow, and even possibly turn negative.  The economy remains weak.

C.  Personal Consumption and Fixed Investment

A positive in the figures is that household expenditures, for both personal consumption and for residential investment, continued to strengthen.  Personal consumption (which accounts for 71% of GDP), grew by 2.9% and accounted for 2.04% points of the 2.2% growth.  And residential fixed investment (mainly housing) grew at a very fast 19.1% pace, following the 11.6% growth of the fourth quarter.  These are strong figures, and suggest housing may be starting to recover.  However, as had been noted in the January 27 blog posting, residential fixed investment has fallen by so much in the crash of the housing bubble (to just 2.3% of GDP now, from a high of over 6% during the bubble, and a more normal 4% of GDP or so), that such investment would need to double to return to normal levels, or triple to get back to where it was before.  And with its current small share of GDP, the 19.1% growth of residential fixed investment only accounted for 0.40% points of the 2.2% GDP growth in the first quarter.

Offsetting this positive news on household consumption and investment, there was a decline in business (i.e. non-residential) fixed investment.  Business fixed investment had been strong earlier in the recovery, from early 2010 through to late 2011, but is estimated to have contracted by 2.1% in the first quarter.  This subtracted from GDP growth.  And with business fixed investment (at 10.3% of GDP currently) much larger than residential fixed investment, the declining growth of business fixed investment has pulled down overall fixed investment from a 13.0% rate of growth in the third quarter of 2011, to 6.3% in the fourth quarter, and to just 1.4% in the first quarter.

D.  Fiscal Drag Continues

Finally, and most stupidly in a still depressed economy with high unemployment, government expenditures are falling, acting as a drag bringing down the overall economy.  And while earlier this fiscal drag was mostly due to cuts in government expenditures at the state and local level, cuts in federal expenditures are now also pulling down the economy. Federal government expenditures on goods and services fell by 5.6% in the first quarter, following a fall now estimated at 6.9% in the fourth quarter.  State and local government expenditures continued to fall (as they have in 11 of the 13 quarters since the first quarter of 2009), but now federal expenditures are falling even faster.

The direct impact of the decline in government expenditures subtracted 0.6% points from what growth would otherwise have been in the first quarter.  That is, had government expenditures simply remained flat rather than fallen by 3.0% (for federal combined with state and local), GDP growth would have been 2.2% + 0.6% = 2.8%.  With a modest 3.0% growth (instead of a 3.0% cut) in government expenditures, growth in the first quarter would have been a more respectable 2.2% + 1.2% = 3.4%.  And assuming a multiplier of just 1.5, the growth rate would have been 2.2% + 1.5×1.2% = 4.0%.  While still modest, this would bring GDP growth closer to the rate needed for a sustained reduction in unemployment.  And as was noted in a previous posting on this blog, had government expenditures been allowed to grow at the pace it had during the economic downturn after 1981 during the Reagan years, the economy would now be at full employment.

Cutting government expenditures when the economy is so weak and unemployment so high only serves to further weaken the economy.  The consequences of an even more severe austerity program can be seen in the UK.  The Conservative Government in the UK has adopted an austerity program similar to what Republicans have pushed to be adopted here.  The new GDP report for the UK issued two days ago indicates that growth in the UK was negative in the first quarter of 2012, as it was in the fourth quarter of 2011.  The two quarters of negative growth meets the criterion normally used to define a recession, and hence the UK has now dropped back into recession for the second time since the 2008 crisis.

The US has fortunately not adopted an austerity program as severe as that adopted by the UK.  However, Republicans are pushing strongly for the US to do so.  If Obama did, the results would be similar to that seen in the UK.  If you are running for re-election, that is not a good place to be.  And that may explain why the Republicans have been pushing for it.

GDP Growth in the Fourth Quarter of 2011: Not a Very Good Report

BEA release of 1/27/12 2011 Q3% growth 2011 Q4% growth Contribution to GDP growth in 2011 Q4
Total GDP 1.8 2.8
A.  Personal Consumption Expenditure 1.7 2.0 1.45
B.  Gross Private Investment 1.3 20.0 2.35
   1.  Non-Residential Fixed Investment 15.7 1.7 0.18
   2.  Residential Fixed Investment 1.3 10.9 0.23
   3.  Change in Private Inventories nm* nm* 1.94
C.  Net Exports nm* nm* -0.11
D.  Government Consumption and Investment -0.1 -4.6 -0.93
   1.  Federal Government 2.1 -7.3 -0.62
   2.  State and Local Government -1.6 -2.6 -0.32
Memo:  Final Sales 3.2 0.8 0.82
        nm* = not meaningful

The Bureau of Economic Analysis of the US Department of Commerce released this morning its first estimate of GDP growth in the fourth quarter of 2011.  The headline figure of 2.8% growth of total GDP might look reasonably good (actually, it is less than is needed in the on-going recovery, with unemployment still so high; it would be a reasonable growth rate if the US were already at full employment).  But the underlying details that led to this overall growth are worrisome.

As has been noted before in this blog, the short run dynamics of the quarter to quarter change in GDP is heavily influenced by what is happening to the change in private inventories.  Keep in mind that it is the change in the change in private inventories that is one component of the change in GDP in any given quarter.  In the third (and final) revision to the estimated GDP accounts for the third quarter of 2011, the change in private inventories was essentially zero.  This was down from a positive growth in inventories in the second quarter, and hence the contribution to the change in GDP in the third quarter was negative.  I noted then that there was a good chance that inventories would return to some positive growth in the fourth quarter, and hence spur the GDP growth figure for the quarter.  And this they did.  According to this first estimate for the fourth quarter, 1.94 percentage points of the 2.76% growth in total GDP (rounded to 2.8% in the reports), was due to this bounce back of  private inventories.  That is, 70% of the growth (1.94 / 2.76) was due to the change in the change in private inventories.

Leaving out this change in the change of private inventories, the growth of final sales was just 0.8%.  This is substantially down from the 3.2% figure for the third quarter.  This is a disappointment.  If final sales do not grow by more than that now, in the first quarter of 2012, one can easily see private inventories being cut back, and overall GDP growth would then be negative.  If that happens for two quarters, one will have met the standard definition of a new recession.  Not good in an election year (or any year for that matter).

There were two main reasons why final sales grew so much more slowly in the fourth quarter of 2011 than in the third quarter.  One was that non-residential fixed private investment grew by only 1.7% in the fourth quarter, sharply down from the 15.7% annualized growth in the third quarter.  It was still positive growth, and hence contributed to overall GDP growth, but only by 0.18 percentage points vs. a contribution of 1.49 percentage points in the third quarter.

Offsetting this a bit was the encouraging figure that residential fixed investment (mainly housing construction) grew at a 10.9% rate in the fourth quarter.  This was the fastest growth for such investment in a year and a half.  But this quarter to quarter figure can bounce around substantially.  More importantly for the contribution to overall GDP growth, residential fixed investment has declined by so much (since 2006), that it is now a relatively small share of GDP.  It would need to triple (i.e. grow by 200%) to get back to where it was before.  And non-residential fixed investment is 4.6 times as large, so what is happening to non-residential fixed investment is much more important.

But the most important reason for the disappointing growth in fourth quarter GDP was an absolute decline in government expenditure.  Total government consumption and investment expenditure fell by 4.6% in the fourth quarter, with federal government expenditure falling by a sharp 7.3% and state and local government expenditure falling by 2.6%.  For 2011 as a whole, federal expenditure fell by 2.0%, while state and local expenditure fell by 2.3%.

With this drag caused by falling government expenditures, it should not be surprising that GDP growth was so weak, held up mainly by inventory accumulation.  And if inventories now revert (over time, the quarter to quarter changes average close to zero), the US could fall back into a recession.  Yet many Republicans and especially the Tea Party supporters continue to claim that the way to get strong growth is for government to contract.  They claim that such contractionary policies will be expansionary.  Yet one sees no evidence of this in the new figures.  If it were not for the accumulation of private inventories (items produced but then not sold), GDP growth in the fourth quarter of 2011 would have been extremely weak.  Contractionary policies are contractionary.

But there was good news on the inflation front, assuming one believes lower inflation is always good.  As part of the GDP accounts, the BEA also estimates the price deflators for the various GDP components (so as to go from the nominal measures to real ones, so one can then get real growth rates and changes), and in particular the price deflator for Personal Consumption Expenditures (PCE).  This PCE deflator is favored by many, including reportedly Alan Greenspan (although he in fact focused more on the core PCE deflator, which excludes food and energy prices), as the best estimate of what is happening to US inflation.  The PCE deflator rose by 1.8% in 2010 as a whole, and then at an (annualized) rate of 3.9% in the first quarter of 2011.

Conservative economists, such as John Taylor of Stanford and Allan Meltzer of Carnegie Mellon, as well as Republican politicians such as Congressman Paul Ryan and others, had complained of the Fed’s aggressive policies to spur the economy, and asserted that they would lead to high inflation in the US (see, for example, here and here).  John Taylor often invoked the hyperinflation in Zimbabwe as a warning of what could happen if monetary policy was not brought under control (see, for example, here).  The rise in the PCE deflator in early 2011 was promoted as evidence of inflation starting to rise.  Keynesian economists, such as Paul Krugman, argued inflation was not a concern, with the economy in a liquidity trap and high unemployment keeping down wages so that unit labor costs were falling or flat.  They argued that the rise in observed inflation in early 2011 was due to changes in volatile commodity prices such as oil, and that such changes are rarely sustained.

What has happened since early 2011 clearly supports Krugman and the Keynesians.  After  rising at a 3.9% rate in the first quarter of 2011, the PCE deflator rose at a 3.3% rate in the second quarter and a 2.3% rate in the third quarter.  And the newly released figures for the fourth quarter indicate an estimate of just a 0.7% rise in the fourth quarter.  While the fourth quarter figures are subject to change, the trend is clearly down, with an inflation rate that is indeed arguably now too low.  Such a low inflation rate makes it more difficult for the economy to adjust (as relative prices are then more difficult to adjust), plus the very low rate increases the risk of the economy declining into price deflation, where it can be very difficult to emerge (as Japan faced in the 1990s).

One final point:  One should not put too much weight on any figures on the economy for just one quarter.  Quarter to quarter figures can bounce around a lot.  And the figures released today are simply the first estimates of what the economy was doing in the last quarter of 2011.  Over the next two months, these initial estimates will be revised twice, as is always done.  Sometimes the revisions can be significant.

Still, some of the initial estimates are of concern, and should the trends continue into 2012, the economy will be in trouble.