Fourth Quarter GDP Turns Barely Positive
Last month, the initial release of fourth quarter GDP showed the economy shrinking by .1% during the final three months of the year. As I noted at the time, it’s likely that this number would change as the figure is revised over the following two months. Today, the first revision was released and, while GDP growth did turn positive, there’s nothing to write home about:
Breathe a tiny sigh of relief, if not exactly contentment: the American economy grew just barely in the last quarter of 2012.
Output expanded at an annual rate of just 0.1 percent, which is basically indistinguishable from having no growth at all and is far below the growth needed to get unemployment back to normal. But at least the economy did not shrink, as the Commerce Department had originally estimated last month, when the first report suggested that output contracted by an annual rate of 0.1 percent.
The department’s latest estimate for economic output, released Thursday, showed that growth was depressed by declines in military spending (possibly in anticipation of the across-the-board spending cuts set to begin Friday) and the amount that companies restored their stockroom shelves.
“The good news with business inventories is that what they take away in one quarter they tend to add to the next,” said Paul Ashworth, senior United States economist at Capital Economics, referring to the measure of this restocking process. “So there’s a good chance that first-quarter numbers will be better than originally thought.”
The output growth number was revised upward from the original estimate partly thanks to updated, and improved, data on business investment and net trade. Imports were lower than previously reported and exports were higher.
Economists expect that government spending will continue to drag on the economy this year, especially if Congress does not avert the spending cuts, which would shave around 0.6 percentage point off growth. Many are hoping that even if the cuts go through, Congress will reverse them in short order.
“They can always change their minds when they have to renew the continuing budget resolution at the end of this month or in April or May,” said Mr. Ashworth. “My expectation is that at most the cuts stay a month or two, and in most departments, with a wink or a nod, they won’t do anything crazy.”
Even if government does lop off $85 billion in the so-called sequester, as current law states, the private sector will offset most of this drag, thanks to the housing recovery and other sources of strength. Forecasts for the first quarter are for annual growth around 2.4 percent to 3 percent.
We’ll get one more revision of this figure next month but, given the unique circumstances of the final quarter of last year such as a one-time 22% drop in military spending, it’s unlikely that the final number will be much higher than it is now. The big question will be whether the estimates for stronger growth going into 2013 will pan out. There are, as noted above, positive signs such as an apparent upturn in housing. However, there have also been indicators that could be a sign of a slowing economy. Specifically, Walmart has reported declining in-store sales for both January and February, and other retail outlets also appear to have slow sales. This may be an indication that consumers are staying on the sidelines, and that would slowdown economic growth. We’ll get the first estimate for 1st quarter GDP in April.