Wednesday, January 30, 2013

Fourth Quarter GDP Report

This morning, the government released its first estimate of economic growth for the fourth quarter of 2012.  The headline number reveals that economic growth was negative (-0.1%), the first contraction since the end of the Great Recession in the summer of 2009.  The number will be revised in about a month and then again in 2 months (and in the future) as more data become available, so it's possible that the economy actually actually grew a little (or for you pessimists, shrank even more).  When was the last time economic growth was negative when the economy wasn't in recession?  1959.  In fact, there were a few episodes of negative growth outside of recessions during the 1950s.  Are we in a recession now?  While the economy is sluggish, a recession is unlikely.  As noted elsewhere, the reasons for the decline in GDP includes businesses increasing their inventories at a slower rate, cuts in defesne spending (which spiked in the third quarter), and a decline in exports (due to weakness in the global economy).  Core business activity, as represented by business investment, residential investment, and consumption, actually accelerated in the fourth quarter.  After declining in the third quarter, business investment surged by 8.4% in the fourth quarter.  Consumption grew at a slightly quicker pace (2.2%) compared to about 1.5% in the middle 6 months of 2012.  Given that the negative aspects of the report are unlikely to be repeated in early 2013, most economists expect positve, but weak growth in the first quarter of 2013.

Is there a chance of back-to-back negative quarters of economic growth?  Though I don't think that will happen, here's the case for it.  The increase in payroll taxes in 2013 will hurt consumer spending; the question is how much?  Consumer confidence took a hit according to the latest report from the conference board, but weaker consumer confidence doesn't always result in weak consumer spending.  We'll get more information next month as reports covering retail sales and consumer spending for January are released.  A second factor is that businesses did not reduce inventories in the fourth quarter, they just increased them more slowly than the previous quarter.  The inventory to sales ratio remains slightly elevated, so weak consumer spending could lead to further efforts to control inventories.  Third, the global economy remains weak as Japan and the UK are on the verge of triple dip recessions, the German economy is slowing down, and several other countries in Europe are in recession.

What's the strongest sector in the US economy?  Housing!  Residential investment has grown at a double-digit rate in 4 of the last 5 quarters.  Residential investment tends to have spillover effects as people buy furniture and appliances for their new home.  So is a recession in the US imminent?  I think it's more likely that the economy will experience a couple of weak quarters rather than outright decline.

A few more observations on the report.  Disposable income surged in the fourth quarter - do you feel much richer?  The reason for the surge was a $123 billion increase in dividend income.  Many companies moved dividends from 2013 to December 2012 to avoid the anticipated increase in tax rates on dividend income.  There will be some give back in 2013 as disposable income will decline since the many of the dividends normally paid in 2013 have already been paid out in 2012.  The upcoming correction in disposable income will also reduce the savings rate, which rose to 4.7% in the fourth quarter.

What's the takeaway from the report?  The economy is sluggish, but a recession is unlikely.