GDP: Troubling Numbers on Investment, Trade and More

By SBE Council at 26 January, 2023, 6:21 pm

by Raymond J. Keating –

The first estimate of GDP (i.e., gross domestic product) in the fourth quarter of 2022 put real economic growth at a below-average 2.9 percent, according to the latest report from the U.S. Bureau of Economic Analysis.

For all of 2022, real GDP under-performed at 2.1 percent.

Fourth Quarter 2022 Data

As for the fourth quarter, it must be noted that key areas saw little growth or even declined. Investment is vital to current and future growth. Nonresidential (business) investment grew at a meager 0.7 percent rate. In terms of major sectors of business investment, structures squeezed out 0.4 percent growth (which actually was better than the declines in the previous six quarters), while equipment registered a woeful -3.7 percent. Only the stalwart intellectual property products investment saw growth at 5.3 percent, though that was the slowest rate of growth since the full pandemic second quarter of 2020.

Residential investment (i.e., housing) plummeted by 26.7 percent in the fourth quarter of 2022. That’s three quarters in a row of double-digit declines.

Meanwhile, trade fared poorly in the fourth quarter. Real exports declined by 1.3 percent and real import fell 4.6 percent (the second consecutive decline).

Also, personal consumption expenditures came in at a lackluster growth rate of 2.1 percent.

So, from where did the bulk of fourth quarter growth come?

First, the transitory change in private inventories contributed about half of the fourth quarter’s 2.9 percent rate of growth (specifically, inventories contributed 1.46 percentage points to that 2.9 percent rate). Plus, government consumption and investment contributed 0.64 percentage points to the overall growth rate. That’s a total of 2.1 percentage points accounting for the 2.9 percent growth rate.

Inventories plus government does not make for a healthy growth rate.

Annual 2022 Numbers

Regarding the annual growth rate of 2.1 percent for 2022, the key negatives were consumption of goods (-0.4 percent), nonresidential structures investment (-7.4 percent), and residential investment (-10.7 percent). In addition, overall nonresidential investment growth slowed (3.6 percent in 2022 versus 6.4 percent in 2021).

And while trade suffered at the end of the year, for all of 2022, both export and import growth were strong (7.2 percent and 8.1 percent, respectively).

Compared to Pre-Pandemic Levels

Finally, fourth quarter 2022 GDP data show us where the economy stood two-and-a-half years after the pandemic struck in the first two quarters of 2020. So, where did key levels stand in the fourth quarter 2022 versus fourth quarter 2019, that is, three years earlier?

Real GDP was up by only 5.1 percent over this three year span. Personal consumption expenditure growth ran ahead of overall GDP growth at 7.8 percent. Meanwhile, nonresidential investment registered 5.1 percent growth, with structures investment down by 24.4 percent, equipment up 5.8 percent, and intellectual property products up by 24.2 percent. As for residential investment, it was down by 6.2 percent.

On the trade front, real exports were basically flat over three years (+0.9 percent), while real imports grew by 12.4 percent.

The Ugly Trend That Few Seem to Care About

No matter how you look at this latest take on real GDP, the numbers tell a story of an under-performing economy. Unfortunately, while the past three years have been wildly tumultuous, we should have seen more of a snapback from the pandemic and related shutdowns. But we haven’t, and that fits in with the past 16 years in which U.S. growth has slowed markedly.

Consider that real GDP growth averaged 3.1 percent annually from 1952 to 2022. And from 1952 to 2006, the average registered 3.5 percent. But from 2007 to 2022, average real GDP growth came in at a miserable 1.7 percent. And by the way, if we factor out the three pandemic years, again growth averaged only 1.7 percent from 2007 to 2019.

Also, nonresidential (business) investment – again, critical to current and future growth – averaged a real annual growth rate of 4.6 percent from 1952 to 2022, and 5.0 percent from 1952 to 2006. But from 2007 to 2022, it averaged only 3.1 percent, and from 2007 to 2019 not much better at 3.4 percent.

And now concerns persist about the economy slipping back into recession in 2023.

In the midst of all of this, it’s rather stunning how disengaged or mistaken federal elected officials are. Our policy focus needs to be on a pro-growth agenda centered on tax and regulatory relief, and free trade, along with government spending restraint and immigration reform expanding much-needed entrepreneurs and workers. Yet, it’s hard to find anyone leading with such a vital agenda. Indeed, it’s easier to find policy leaders, such as President Biden, actively pushing, and imposing, the exact opposite policies.

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council. His latest book is The Weekly Economist: 52 Quick Reads to Help You Think Like an Economist.