4th Quarter GDP Revised Downward; Headwinds Persist In 2011

The federal government and state governments are already beginning to see the bitter side of budget cuts; reduced economic output.

The Commerce Department has revised fourth quarter GDP downward to 2.8 percent from the earlier estimate of 3.2 percent. The original consensus estimate was 3.6 percent growth, so the new number is considerably lower than initially anticipated.

That presents an ominous sign of what's ahead as the federal government tries to reign in its serial deficits that are now exceeding $1 trillion annually.

Faced with continuously steep budget shortfalls, state governments cut spending by 2.4 percent in the fourth quarter, which greatly exceeded the 0.9 percent first estimated.

As previously noted, I was quite dubious about initial consumer spending estimates that came in at 4.4 percent. The revised number was lowered to 4.1 percent. Yet, due to rising gas prices, more and more disposable income will be directed toward fueling up cars, leaving less money for other purchases.

If consumers can't maintain their fourth-quarter spending pace — which was still the highest since 2006 — the effects of federal and state cutbacks will be all the more severe.

Higher gas prices will affect every facet of the economy, from production, to agriculture, to shipping, to transportation, to hiring, and on and on.

The economy grew 2.8 percent in 2010, the highest in five years. Yet, that was a relatively weak pace. From 1965 to 2008, US economic growth averaged 3.2 percent.

The other side of the coin is that 2010 was a marked improvement from 2009, the year the US experienced its worst economic output since the Great Depression.

Consumer spending accounts for 70 percent of all US economic activity. However, if the unemployment problem doesn’t turn around — and there are no indications that it will — consumers will be unable to spend the country out of its doldrums.

Even if unemployment were virtually cut in half for all of 2011 — coming down to 5 percent — it would only lower the jobless rate by one percentage point.

The economy needs to add about 150,000 jobs a month just to absorb the annual population increase and the entrance of new people into the workforce, such as college grads.

That gives you some perspective on the kind of problem we're up against.

Moreover, newly created jobs tend to be lower-paying than those they've replaced.

Paul Ashworth, chief U.S. economist at Capital Economics in Toronto, says that many of the jobs being created don't match the pay, the hours, or the benefits of the 8.75 million positions that vanished in the recession.

These lower wages and salaries will limit consumer spending and economic growth.

That's why it's hard to imagine consumer spending being hearty enough to reignite the economy, or that economic growth will maintain a healthy pace.