31 January, 2013

Real GDP Down 0.1%, According To B.E.A.

The Bureau of Economic Analysis has released, in a press statement, the data for the 4th quarter GDP from last year (the full text of which is available on their website, http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm). According to this advance report, real GDP declined at an annual rate of 0.1% in the fourth quarter (in other words, from the third to the fourth quarter) of last year. While these numbers are considered to be a preliminary, and are pending further review to come over the next few months, this estimate does contain some specific data pertaining to the causes of the very slight decline in real GDP.
Consumer spending increased slightly from the third to fourth quarters last year. Real consumer consumption spending increased at a rate of 2.2% from the third quarter. Of particular note was the increase in equipment and software purchases, increasing 12.4% over the third quarter levels. Investment declined overall, despite an increase (15.3%) in residential fixed investment. Government spending declined a total of 15.0%, with large declines in national defense spending (down 22.2%), which more than offset for small increases in non-defense spending (1.4%) and state and local spending (0.4%). Net exports also declined. Real exports decreased 5.7% and real imports decreased 3.2%. This results in the net exports also declining, since the drop in exports exceeded the drop in imports, widening the trade deficit. Clearly, international trade had, overall, a deleterious effect on real GDP this quarter (and over 2012 as a whole) given that the trade deficit represents a net subtraction from real GDP calculations. The effect of trade, however, may not have been the largest contributor to the decline in real GDP, given that there were also declines in government spending and in investment which, when combined with net exports, served to offset gains in private consumption spending.
My assessment of the economy over the next several months is tenuous. I think that, once put into context by looking at the events which took place in the fourth quarter and the numbers for 2012 as a year, the fourth quarter slump in domestic output might not be as foreboding as it might at first seem.
For instance, the real GDP rose more in 2012 than it did in 2011, increasing from 1.8% to 2.2%. According to Forbes.com (http://www.forbes.com/sites/abrambrown/2013/01/30/u-s-economy-stumbled-at-the-end-of-2012-q4-gdp-down-0-1/), the 15% total decrease in government spending and the decrease in business inventories and investment managed to wipe out 1.6% of the total GDP, befuddling some predictions of a 1% increase in real GDP in the fourth quarter. The decline in business investment and in inventories might reflect any of a number of phenomena which took place late last year, included among them significant hesitation in anticipation of and uncertainty about government fiscal policy with the threat of the ‘fiscal cliff’ looming overhead and the effects of Superstorm Sandy on the Eastern Seaboard.
However, the main bright spot in this report is the one which, upon further review, gives me concern over the first quarter of 2013. Consumer consumption spending increase a further 2.2%, above and beyond the 1.6% gained in the third quarter. This (relative) spike in consumption spending is one which I think will not hold into the first half of 2013, given that personal outlays increased $95.0 billion (3.3 percent) in the fourth quarter, compared to 3.1% in the third quarter. I suspect that much of the recent gains in consumption spending have not reflected lasting gains, but instead transitory effects of the holiday shopping season (among others).
In the end, I am concerned about the economy over the first part of 2013. I would not be surprised to see another decline in real GDP or, at best, an anemic growth of less than 1%, after the first quarter. I think that consumption spending will decline, but will partially be offset by increase in business investment and government spending. In particular, I certainly do not think that government spending will decline another 15%. I also expect the trade deficit to narrow slightly, as is often the case during recessions. I would not be surprised to see net imports falling again, while I do expect net exports to rebound slightly.

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