Initial GDP Report Shows Economy Contracting In Final Quarter Of 2012
Some surprisingly bad economic news
Going into today’s release of the initial estimates of Gross Domestic Product for the final quarter of 2012, analysts were expecting a bad number. The economic factors that had led to a fairly decent third quarter were exceedingly temporary, and there was plenty of evidence that the economy was slowing in the final months of the year at least in part due to uncertainty over the impending fiscal cliff. Additionally, Hurricane Sandy hitting the New York/New Jersey region in late October was likely to have at least somewhat of a negative impact on the economy. So, people were prepared for a bad number today. What nobody was prepared for, though, was an indication that the economy may have actually slightly contracted:
The United States economy unexpectedly reversed course in the final quarter of 2012 and contracted at a 0.1 percent rate, the Commerce Department said Wednesday, its worst performance since the aftermath of the financial crisis in 2009.
The drop in gross domestic product was driven by a plunge in military spending, as well as fewer exports and a steep slowdown in the buildup of inventories by businesses. Anxieties about the fiscal impasse in Washington also contributed to the slowdown, one reason stockpiles grew more slowly.
Despite the overall contraction, there was underlying data in the report suggesting the economy is not on the brink of a recession or an extended slump. Residential investment jumped 15.3 percent, a sign that the housing sector continues to recover, for one. Similarly, investment in equipment and software by businesses rose 12.4 percent, an indicator that companies are still spending. Although economists expected output to decline substantially from the 3.1 percent annual growth rate recorded in the third quarter, the negative number still caught Wall Street off-guard. It was the weakest economic report since the second quarter of 2009.
“I’m a little surprised,” said Michael Feroli, chief United States economist at JPMorgan. “It grabs your attention when you have a negative number across everyone’s screens.”
Stocks were down only slightly in early trading on Wall Street, as some traders shrugged off the unexpected drop.
Mr. Feroli had been expecting growth to come in at 0.4 percent, which was well below the 1.1 percent consensus among economists on Wall Street. Like some other observers, Mr. Feroli said there were hints the economy was performing slightly better than the headline number suggested.
The 22.2 percent drop in military spending – the sharpest quarterly drop in more than four decades – along with the drop in inventories and exports overwhelmed more positive indicators in the private sector, he said.
For example, final sales to private domestic purchasers, which strips out government spending as well as trade and inventories, rose by 2.8 percent. “Consumers and businesses kept spending at a pretty steady pace,” Mr. Feroli said. “There was a lot of noise that moved the headline around.” For the entire year, the economy grew by 2.2 percent, a slight improvement from the 1.8 percent annual rate in 2011.
But with unemployment stubbornly high at 7.8 percent and growth expected to remain slow in the first quarter, the poor report Wednesday was likely to set off more finger-pointing in Washington.
While these numbers are certainly depressing, there are a few caveats to keep in mind. First of all, this is an initial estimate of GDP growth and there will be further updates to these numbers coming in February and March. It’s likely that we’ll see at least some modest uptick in the numbers out of these revisions, although it seems unlikely that those revisions will push GDP growth anywhere close to 1%, and certainly not 2%. So, to some extent, it’s worthwhile not to pay too much attention to this initial number and wait and see what’s going on in a month or two. Second, as Matthew Yglesias notes, the report isn’t quite as bad as the top line number makes it seem:
And yet when you peer into the internals, the situation looks surprisingly benign. For example, “real disposable personal income increased 6.8 percent”, which is really solid. Consequently, both personal consumption and personal savings went up. Nonresidential fixed investment went up 8.4 percent. Residential investment went up 15.3 percent. So people are consuming more and saving more and businesses are investing more and we’re adding to the housing stock. That’s all good stuff.
On the downside we had, as expected, a decrease in net exports and a decrease in inventories. We also had a small decline in state and local government consumption as state/local austerity continues to bite. But what really slammed the economy was that national defense expenditures fell 22.2 percent. That’s a lot! And the pacing of military spending is weird. Simply put, nobody cut the Pentagon’s budget by 22.2 percent. But the timing of spending and appropriations doesn’t line up perfectly, so there are strange swings in the military element of GDP.
Brad Plumer has a fairly good explanation for the reason behind this unusually large drop in military spending, and explains why it’s unlikely to occur again in the future. For that reason, it’s unclear that what happened in the fourth quarter of 2012 tells us much of anything about what’s going to happen going forward. Of course, it’s worth noting that we have another round of spending cuts coming down the line. The sequestration cuts originally scheduled to take place at the start of the year have been delayed until March and it seems unlikely at this point that they’ll be avoided in whatever kind of deal Congress and the President end up making. Additionally, the CBO estimated that the tax increases that took effect at the start of the year will shave 0.25% off of GDP growth for the entire year. So, I can’t really say that this was a “good” GDP report in any sense of the word.
A negative GDP report is nothing to turn askance at, of course. It’s not a recession, that only happens when there are two consecutive quarters in which the economy contracted, but it’s still not a very good piece of news. Since 2010 there have only been two quarters where GDP growth exceeded 2.6%, and many in which growth ended up being below 2%. Indeed, even before today’s numbers most analysts were forecasting that the economy would grow by 1.5% for all of 2013. Those numbers may end up getting revised downward after today’s numbers. This is barely economic growth, and it’s certainly not the kind of growth we need to deal with our myriad of economic problems ranging from unemployment to our ongoing fiscal crisis. Ideally, we should be seeing GDP growth ranging at least between 2.5% and 3% on a consistent basis. Until that happens, the economy we’ve been living with since 2009 is going to be “the new normal.”
Kind of highlights the biggest point of hypocrisy for Republicans over the past 30+ years: they claim that government spending is bad for the economy, but also claim that military spending is good for the economy.
Given that we had a hurricane that did an amount of damage equal to 1% of the US quarterly GDP and the fiscal cliff with all the BS that entailed, this is about as bad a report as I expected.
Those revisions could be interesting. Remember how awful 2008 Q4 turned out to be? Or how the economy was actually recovering when Bush was turned out of office? Economics is hard. The media goes on about how its “unexpected” but all economic numbers are a bit unexpected because they are so noisy.
Greetings:
Not just bad news, historic and unprecedented, too.
But don’t worry, I’m, pretty sure our pied piping President will fix something in the next for years.
I’d call that a very carefully buried lede. As geek says, the news that defense cuts can shake out as GDP decline attacks conservatism, to say nothing of libertarianism, at the roots.
“Unexpectedly.” Right.
The unemployment numbers stink, but are massaged and glossed over. The inflation number is bogus. The “housing recovery,” such as it is, is manufactured by inflationary government policy and government subsidized bleeding in of shadow inventory by banks. And the tax increase is only now taking effect. Look out. Welcome to Obama 2.0, and this has been going on for quite some time.
I know, I know, its all George Bush’s fault. Lawdy.
HummaBrumma Joe was giving Doug crap recently on this blog about the economy. Well, the economy sucks, Joe. You are one cruel SOB for serially blowing Obama while real people in the real world are suffering under his administration and his policies. And there is no end in sight.
The worst economic steward of my lifetime.
@Drew:
That’s kind of the crux though. Neither conservatives nor libertarians should believe in economic stewards. Or they should change parties.
As recently as the Bush administration conservatives actually made the argument that government spending, and not just government borrowing, “crowded out” free market initiatives.
If that were true, reductions in defense spending would “free up” the market for more creative enterprise.
I mean seriously, net-net, you are faulting Obama as a “steward” who is cutting government spending. That is more than the daily minimum for cognitive dissonance.
BTW, speaking of OTB reportage, I think this is more typical of today’s coverage:
Christopher Matthews at Time Magazine: Why Today’s GDP Report Isn’t As Bad As It Looks
U.S. Economy Unexpectedly Contracts in Fourth Quarter
” Unexpectedly” oh please.
Living is easy with eyes closed, misunderstanding all you see.
It’s getting hard to be someone but it all works out,
What difference at this point does it make?
Tiger Beat on the Potomac reports the Republicans are good with this and the coming sequester. The austerity will continue until morale improves.
It’s so cute when you pretend to care about “real people in the real world.” Almost as cute as your fellatio fantasies.
It does look like this is a one quarter abberation, nothing to panic about, and we won’t be negative in first quarter.
This is the “official” definition, but it seems to me to mislead. GDP growth of zero or .5% should not be considered recovered. The FED should certainly not feel comfortable if we’re slightly above zero and congress should still provide additional fiscal stimulus if we remain at some low positive number (like the GOPs would let that happen). We really should define recession as a couple quarters below some more realistic break even number, say population growth (about .75%). Or forget GDP and define a recession as a period of unemployment failing to keep up with workforce growth.
This should not come as a surprise. Deficits during Q4 averaged $55 billion per month, down from a 12-month average of $90 billion, which in my opinion is the minimum needed to continue the “muddle-through” scenario.
January is looking particularly bad, with a deficit of around $23 billion.
But at least Doug and the Republicans are happy, as they always are when they hear bad economic news. So there’s that.
@11B40:
What exactly is “historic and unprecedented” about a 0.1% contraction? Now an 8.9% contraction, that’s historic and unprecedented.
Gov’t demand is the only game in town—thanks to the public being overleveraged and Banks borrowing at %0 interest to cover their broken balance sheets (instead of loaning it out–SERIOUS drag on the economy). Under these conditions any drop in Gov’t spending is going to pull GDP down. So here is the gameplan from the party out of power: Cut, cut, cut, then blame the party in power for the recession. Get re-elected to power then spend, spend, spend. Proceed to take credit for putting out the fire they started.
With oil nearing $100 bbl and rising 2 – 2.5 percent is going to be the new great growth rate.
@Pharoah Narim: That was exactly the plan, and it damn near worked. If this -.1% number had been announced for third quarter, just before the election, we might well have just inaugurated Romney/Ryan. And yes, Romney would then suddenly have been a Keynesian all along and we’d have had the “Budget Responsibility Act of 2013” with a 2 trillion dollar fiscal stimulus. Personally, 2T$ wouldn’t be enough to put up with R/R.
I wonder if Doug understood the significance of saying that a sharp drop in government spending caused the economy to contract. The corollary shound be that that a sharp rise in government spending should cause the economy to expand . However, I’m pretty sure that economic conservatives will resist that conclusion, since its based on logic, mathematics, and experience, rather than right wing idealogy.
JP
You are wandering off into the woods of left vs right, guns vs butter. Confusing libertarianism with the current ethos of government activism. Shorter: your comment was stupid.
We have a spending problem, period, full stop. Anyone who doesn’t believe this administration is on a spending binge must reside in an opium den. The president said as much.
You desire, to make a point, to cite the defense budget, a budget that has declined from 40% of GDP after WWII to the teens to upper single digits to lower single digits today. It is the only government budget of significance I know of to show such declining behavior. Perhaps it can go lower. So be it. But it would be a model to be copied. Good luck with that.
You folks are in absolute denial that spending on butter is not our central problem, and is going to bankrupt us. Talk about cognitive dissonance.
Do the math. Cut defense to the absurdity of zero. We still have a spending problem.
I know you guys can’t deal with your irrational and infantile defense of the state, can’t observe the Petrie dishes of Europe and their economic calamity, but really, Obama as the solution??
We are effed.
Europe West with much higher crime rates. Not exactly utopia. More like a regressive dystopia.
That aside, as a ruthless capitalist (some might even say mercantilist) I must say there still are many threads of hope. Commercial real estate selling at very high cap rates. Gold and silver, but that goes without saying. Commodities. Directional strategies using leveraged calls and stop losses. Selected foreign currencies. But obviously not fixed income or equities. Not until the next major crash, that is. The moral of the story being there still are plenty of opportunities for substantial profits even in this malaise economy with which we’ve saddled ourselves.
@Drew:
The funny thing is, the economic calamity in Europe you use as evidence is, in large part, caused by the very government austerity that you think is the answer to our problem.
1). For the economy to grow spending must increase. The private sector cannot, cannot fill the gap because its income is far too weak relative to its indebtedness.
2). The foreign sector is a $600 billion spending drain. If we started running a balanced budget today that means businesses and households would be forced to take on $600 billion in debt per year.
3). The only remaining sector that can provide the income necessary to drive growth is the government sector. I don’t care what your ideology is, or your morals, or your religion; there is no way around this. No appeal to Barro or Hayek or Fama or any other economist will change this reality, it is unavoidable.
@Drew:
I think you invite me into the weeds there. The bottom line seems much simpler and shorter. It doesn’t need so many words:
If government spending is the problem, this defense reduction should have been nothing but good news for the economy.
Full stop.
@Drew:
You cannot possibly be serious. Your post is so unhinged I don’t even know which part to quote as the worst. You keep talking about this spending binge, but never actually providing any evidence. I wonder why that is?
As an aside, a few months ago I commented on this here blog that I expected Q4 2012 to come in well under 2%, but I never imagined it would come close to zero. We should keep in mind this data is coming in before a $250 billion increase in payroll taxes. There’s every reason to expect the rest of Q1 2013 to be rough.
@Drew:
You mean, the European states that are in economic trouble because they’re practicing austerity, the same austerity that conservatives prescribe as the solution here?
By the way, it’s petri, not Petrie. It refers to the scientific device, not to Rob and Laura Petrie, the charming characters so ably played by Dick Van Dyke and Mary Tyler Moore in “The Dick Van Dyke Show.”
To my knowledge austerity and real spending reductions have never caused an increase in aggregate demand or real economic growth.
Republicans are heartened by this news, right? They’be wanted spending reductions, even in this economic environment. It’s medieval medicine to be sure.
@john personna: That should be but on bulletin boards across the country.
@ Rafer Janders
I had a serious thing for Laura Petrie back around ’66 or so.
Wow, I didn’t know Karl Smith and Modeled Behavior were hosted at Forbes now:
How Heavy Is the Federal Debt ?
It’s a sophisticated look at debt burden, using not only debt-to-gdp, but also borrowing costs.
@al-Ameda: Some continue to cling to the notion of Ricardian Equivalence, that consumers are so rational and foresighted that expansionary policies will be nullified. So if, for example, you cut taxes to stimulate, consumers will not spend more because they “know” that taxes must rise in the future to balance the books. Ditto for spending.
The problem is that this has never been observed. When Reagan cut taxes in 1981 economists of the above persuasion insisted the savings rate would increase so as to pay for the future tax hike, offsetting the stimulatory benefits of the cut. Of course by 1983 the savings rate had fallen in contradiction of RE and the economy expanded.
@Nikki:
For what it’s worth, the best argument is probably that this defense cut will yield innovation & etc. as contractors turn their attention on other markets.
Of course, in other news Record Profits No Job Creator on Farms as Owners Automate
@anjin-san:
The capri trousers with ballet flats, right? She created that look.
I found the guy for Tsar:
Fund manager betting on a bear market in government
The 60s called and wants their Birchers back – Morey Amsterdam
@KariQ: really, so they should just print more and more money that they can’t back up? hitler tried that, it worked for a while too but then…..you know.
and speaking of phony money, what have all these stimulus injections done for us lately along with the free loans the fed is still giving to the big banks?
i hope you’re in your 20’s and have to pay this stuff back for the rest of your life, you voted for it.
@bill:
What is it you think should “back” money? The Hitler comment I’ll ignore because it’s dumb.
We’ve only had one stimulus, it broke the free-fall we were experiencing and put the economy back on track for weak growth, while countries which pursued austerity are experiencing depressions or triple-dip recessions.
Pumping up bank reserves has actually had a contractionary effect, so you’re at least right about that not being helpful.
This is good news for John McCain.
,Things in this area aren’t getting any better: local factory laying off, food prices increasing, schools strapped for money and sending kids door to door selling junk, exorbitant prices just to go to a movie, mills shut down, shopping mall half empty, people haven’t got a raise in years, anyone who has gone back to work it’s for some two bit job. You tell me just what is getting better ? I know this is not all Obamas fault, but we just can’t tske another four years of this junk. Our leaders don’t know what it is like trying to make a living. The government lies to us with these sugarcoated reports and numbers. I don’t believe a word any of them say. They’re all the same.
@Geek, Esq.:
Defense spending is government spending. It money spent to defend America. Entitlement spending is government spending too. It’s money spent creating or perpetuating entitled people. It’s a bipartisan issue and it is way out of control. It’s all money taken out of the economy in the form of taxes. Where it’s not extorted in the form of taxes it’s borrowed from abroad to the tune of 16 plus trillion dollars. In the end we effectively stifle current and doom future economic growth with our SPENDING problem, regardless of who we choose to blame.
@Ben Wolf: i like hitler analogies, especially when i can throw them at a liberal! anyhow, there’s been 3 stimulus packages since ’07 according to the NYT, 2 were solid stimulus injections- the other the “tax cut/ unemployment extension” they passed in ’10.
it just kinda sucks when I take my kid to open a savings account and they say it’ll cost him money to keep it there, this has got to give someday. The economy seems to be floating at the whim of the fed and the benefits are once again going to those in the higher tax brackets. when the dow hit’s 1500 in this kind of economy you just get that feeling of deja vu.
@ Mike G
So what you are trying to tell us is that you are just not very bright, no?
@bill: @bill: I’d recommend not listening to the New York Times on much of anything. We had a stimulus bill called the American Re-investment and Recovery Act in 2009. Its purpose was to expand the economy by increase spending, meaning the government adopted, for a limited time, what economists call an expansionary budget stance (stimulus).
Since then we’ve passed a couple of very small program extensions on unemployment insurance (funding for jobs programs has been a joke and shouldn’t even be considered). But unemployment insurance is an automatic stabilizer. It’s purpose is to attenuate large swings in the economy by providing a cushion to land on. In economic terms one the ARRA expired and we started fiddling a little with the stabilizers we switched from an expansionary budget stance to a neutral stance and have been there ever since.
Even the $787 billion ARRA amounted to only 1.5% GDP over the period it was distributed. After an economic contraction of 9% it just wasn’t going to make a huge difference.
I agree your son should be earning interest. He isn’t because the Fed is foolishly pursuing “easy money” policies by reducing interest rates to almost zero and starving the private sector of income from its savings. They still don’t seem to realize that their actions are deflationary rather than inflationary, because they’re reducing people’s spending power.
@Mike G: Taxes do not fund spending. In fact it is impossible for this to happen.
@Mike G:
Way to ham-fistedly sneak a bunch of value judgements into your statement of “facts”, guy. So when a defense contractor charges the gov’t $500 for a part that cost his company $0.05, that’s “defending America”, but when someone who’s been laid off collects the unemployment benefits that his own taxes have been funding, that’s “creating entitled people.”
Your assumptions are garbage.
This just in…shrinking Government causes a drag on the economy.
Can anyone show me an economy that grew while the Government was shrinking?
http://www.slate.com/blogs/moneybox/2013/01/30/austerity_and_recovery_government_consumption_is_falling.html
@bill:
Since you don’t appear to even understand the difference between the Weimar Republic and Hitler, I don’t see any reason to respond to the rest of your nonsense.
@Ben Wolf:
Bill Gross gives a smart telling of the credit story.
Ben’s peculiar vantage is a recent invention, and a perspective that claims ownership of previous reality. It’s a map claiming to be the territory.