A Few Observations on the U.S. GDP Report

January 30, 2013

Analysts had anticipated slower economic growth in the final quarter of 2012 but not a 0.1% annualized contraction of GDP. 

The politician/layman’s definition of a recession requires two straight quarters in which real GDP shrinks.  The more technical  requirements of the economists entrusted with dating economic downturns looks at monthly data for such things as industrial production, employment, and retail sales.  Be that as it may, GDP seldom contracts even once in quarters not associated with a recession.  Over the past forty years, in fact, there have been zero quarters of negative U.S. growth that were not imbedded within a recession or adjacent to a period ultimately defined as a recession.

This was the tiniest GDP contraction, just 0.1435% annualized taken out to four decimal points.  This month’s estimate by the Commerce Department of GDP in 4Q12 is based on incomplete data and other findings that will be revised in February and March, and even further when benchmark revisions are conducted.  The reaction of investors to today’s GDP report was greatly blunted because of the highly preliminary nature of the report and in light of other signs that suggest a continuing recovery.

There were indeed encouraging aspects to today’s report.  Personal consumption enhanced GDP by 1.52 percentage points (ppts), up from 1.12 ppts in the third quarter.  Non-residential and residential investment augmented the GDP growth rate by an additional 1.19 ppts, nearly a full percentage point more than in the third quarter.  Real disposable income, whose slack pace of expansion has been a drag on the current economic upturn, had a breakout quarter, rising 6.8% at an annualized rate.  The three drags on economic growth last quarter seem temporary.  Inventories depressed GDP growth by 1.27 ppts.  Net exports, which should do better in light of the stronger euro and improving global prognosis, had a mildly adverse effect on GDP, and defense spending isn’t going to repeat last quarter’s 22.2% annualized plunge again.  It should be finally noted that despite the setback last quarter, the calendar year trend in growth was favorable.  Real GDP also grew slightly faster in 2012 as a whole, 2.2%, than in 2011 (1.8%).

Markets chose to see a half-full cup, but a half-empty perception is not a big stretch of the imagination.   

  • Real GDP rose just 2.4% in the five years between 4Q07 and 4Q12, an annualized average pace of just 0.5%.
  • Over the twelve years (or 48 quarters) since the last quarter of 2000, real GDP grew only 1.6% per annum.  Whether compared to the previous 10 years (3.6% a year in 4Q90-4Q00), 25 years (3.3% per annum in 4Q75-4Q00), or 50 years (3.4% annually during 4Q50-4Q00), the 1.6%  per year pace over the last dozen years constitutes at least a halving relative to America’s long-term historical growth rate.
  • The U.S. economy’s transformation into a more lethargic engine can be also seen in the following progression.  From an increase of 4.4% per year in the four years to 2000, growth slowed to 2.2% in the four years to 2004, 1.8% in the four years to 2008 and 0.8% in the four years to 2012.
  • The weakness in government spending is actually not a new development.  It’s an irony of the whole debate on the budget and broader role of government in the economy, that public sector spending, as depicted as a demand component of GDP, has actually been contracting under President Obama.  After edging up just 0.6% between the final quarters of 2009 and 2010, such fell 3.1% over the four ensuing quarters to 4Q11 and by 1.7% over the latest four-quarter period.  One way or another, more restraint is going to be imposed during Obama’s second term.
  • Nominal GDP rose only 0.5% at an annualized rate between the third and fourth quarters of 2012.  Excluding five quarters during the Great Recession, one has to go back to 3Q01 (+0.2%) and then to 4Q90 (-0.3%) to find a weaker result for nominal GDP than 0.5%.  In Japan, the downturn of nominal GDP has been a central feature of deflation.

For those who believe that less inflation is always preferable to more of such, the trend in the personal consumption deflator couldn’t be better.  Expressed as an annualized quarter-on-quarter change, such slowed from 2.5% in the first quarter to 0.7% in 2Q and, after climbing 1.6% in 3Q, again slowed last quarter to 1.2%.  The increase in the core rate was even less at 0.8% in 4Q12.  The Fed’s majority has not been thrilled by these ultra-low readings, observing that they are below target and that without continuing stimulus inflation is likely to remain below target.

Copyright 2013, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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