Wednesday, January 31, 2007

Unexpectedly Strong U.S. Growth

Fourth quarter U.S. GDP growth came in a lot faster than what most analysts -including me- expected. While this was only the "advance" number, subject to many revisions, it is just as likely to be upwardly revised as downwardly revised. Personal consumption, business investments, residential investments and inventories came in roughly in line with what I had expected, so the upwards surprise was attributable to the remaining two components: net exports and government demand.

That the trade deficit fell during the fourth quarter was expected given the remarkably low October and November deficits. The Bureau of Economic Analysis apparently expects it to stay as low during December. What was really surprising was that this to such a large extent was attributed to volume changes, rather than just price changes (read: oil price collapse). It remains to be seen whether this will really materialize.

Government spending increased a lot faster than expected. But that was actually not the result of faster nominal spending growth, but a sharp deceleration in the price index for government consumption. Price indexes for government spending are inherently dubious due to the fact that it is determined by a non-market actor, but presumably this deceleration was due to lower oil costs as well.

The oil price collapse, together with other effects from the warm weather was of course the by far most important reason why the U.S economy was so strong despite the housing bust. Oil prices is likely to provide a further -albeit smaller- boost during the first quarter of 2007, despite the recent recovery in oil prices. If it stays this low (or falls further, of course) the U.S. might actually escape a housing-related recession-at least for 2007. The deep imbalances of the U.S. economy means however that this will only represent a postponement of it.


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