In today’s constantly changing and evolving economy, business valuators must have a firm grasp on the current state in order to successfully complete a business valuation engagement. Many finance and valuation professionals rely on economic components and indicators as a key point of reference in their work. These components can have a significant impact when valuing businesses, evaluating mergers and acquisitions, and performing a variety of other financial analyses.
The Economic Outlook Update (EOU), published by BVR, digests expansive research from leading authoritative sources into convenient monthly and quarterly reports. Get a sneak peek at the 4Q 2020 EOU with a few key economic performance components showing insights on gross domestic product (GDP), consumer spending, and unemployment and personal income.
Gross domestic product
The Bureau of Economic Analysis (BEA) reported that the nation’s economy—as indicated by GDP—grew by 4.0% in the fourth quarter, a rate that is more consistent with historical figures than the 33.4% rate of growth from the third-quarter 2020 figure or the decline of 31.4% from the second quarter, when the economy had just reopened after the forced shutdown due to the start of the coronavirus pandemic. For all of 2020, GDP contracted by 3.5% after expanding by 2.2% in 2020.
The increase in real GDP reflected increases in exports, nonresidential fixed investment, personal consumption expenditures (PCE), residential fixed investment, and private inventory investment that were partly offset by decreases in state and local government spending and federal government spending. Imports, which are a subtraction in the calculation of GDP, increased.
Final sales of domestic product increased at a rate of 3.0% in the fourth quarter, slower than the rate of 25.9% from the third quarter. Final sales of domestic product are GDP minus the influence of private inventory investment, which tends to be volatile from quarter to quarter. In 2020, final sales of domestic product contracted at a rate of 2.9%. Final sales to domestic purchasers, or GDP excluding trade and inventories, increased at a rate of 4.4% in the fourth quarter, after rising 29.8% in the prior quarter.
Consumer spending in the fourth quarter of 2020 increased at a rate of 2.5%, substantially slower than the rate of 41.0% in the prior quarter, although the third-quarter rate was accelerated due to the economy reopening after the initial shutdown due to the spread of the coronavirus. In 2020, consumer spending contracted at a rate of 3.9%. Consumer spending, also referred to as “personal consumption,” accounts for approximately 70% of the U.S. GDP.
Consumer spending on durable goods—items meant to last three years or more, such as computers, cars, and machinery—went unchanged in the fourth quarter, after a rise of 82.7% in the third quarter. Consumer spending on durable goods grew 6.4% in 2020. Overall, consumer spending on durable goods did not add any points to the fourth-quarter GDP. Consumer spending on nondurable goods—items such as food and gasoline—decreased in the fourth quarter by 0.7% after increasing 31.1% in the third quarter. Overall, consumer spending on nondurable goods subtracted 0.10 percentage points from the GDP. Consumer spending on nondurable goods was at 2.6% in 2020. Service expenditures increased 4.0% in the fourth quarter of 2020 after rising 38.0% in the third quarter. In 2020, service expenditures contracted 7.3%.
Unemployment and personal income
Total nonfarm payroll employment worsened in December, after subtracting 140,000 jobs from the economy. The decline in December was unexpected, as CNBC forecasted a gain of 50,000 jobs. The December jobs report did, however, include revisions to the prior two months that showed an increase of 135,000 jobs, as the October figures increased by 44,000 jobs and the November figures improved an additional 91,000 jobs.
In December, 23.7% of employed persons teleworked because of the coronavirus pandemic, up from 21.8% in November. These data refer to employed persons who teleworked or worked at home for pay at some point in the last four weeks specifically because of the pandemic.
In December, 15.8 million persons reported that they had been unable to work because their employer closed or lost business due to the pandemic—that is, they did not work at all or worked fewer hours at some point in the last four weeks due to the pandemic. This measure is 1 million higher than it was in November. Among those who reported in December that they were unable to work because of pandemic-related closures or lost business, 12.8% received at least some pay from their employer for the hours not worked, which is little changed from November.
About 4.6 million persons not in the labor force in December were prevented from looking for work due to the pandemic. This measure is up from 3.9 million in November. In December, the U3 unemployment rate remained unchanged, at 6.7%. Since May, the unemployment rate had steadily improved over the past six months after hitting 14.7% in April. Employment in professional and business services rose in December, adding 161,000 jobs and 858,000 jobs since February. Retail trade jobs increased by 121,000 jobs. Employment in this sector, however, remains 411,000 lower since February. Notable job gains also occurred in construction (+51,000), transportation and warehousing (+47,000), and healthcare employment (+39,000).
Download a sample monthly report to see all the data
Download the February 2021 issue of the EOU to see more stats on interest rates, exports and imports, consumer prices and inflation rates, energy prices, and more. Plus, learn about an annual subscription to the EOU, an ideal resource for the current economic conditions section of your valuation report.