Wed, JAN 30th, 2013
Q4 U.S. GDP is out, and the headline print is bad [-0.1% vs. +3.1% in Q3]; lower than most economists’ expectations. This was the first “contraction” since Q2 2009.
But, a number of one-off factors were at play causing what we consider major distortion in the data. For example, aggregate government spending dropped -6.6% [vs. +3.9% in Q3] led by a -15% decline in federal government spending [mainly due to a large drop in military outlays associated with the war draw-down]. This subtracted -1.33% from GDP. Slower inventory accumulation took a -1.3% slice from GDP. Inventory changes – notoriously volatile quarter-by-quarter – were at one-third the rate of Q3 [$20B vs. $60.3B]. The latter, to some extent, was the result of cautious businesses deciding to draw from current stockpiles as the fiscal cliff loomed and demand trajectories were questioned. The supply-chain dislocations caused by Hurricane Sandy also dented inventory buying.
The trade deficit increased from $395.2B to $404B, which reduced GDP by -0.25%.
Meanwhile, much of the underlying core economic drivers of growth looked fine: consumption accelerated +2.2% [vs. +1.6% in Q3]; fixed investment jumped +9.7% [vs. +1% in Q3]; investment in equipment & software was up +12.4% [vs. -2.5% in Q3]; residential investment increased +15.3% [vs. +13.5% in Q3]; durable goods increased +14%. These metrics show, in our view, that the real economy is humming along.
All told, the headline GDP number admittedly looks terrible. But, much of the decline was due to ephemeral drops in government outlays [and business inventories], and do not adequately reflect the strength of the real economy. Under the report’s surface, trends suggest that *fear not* this isn’t the start of a new recession.
Perhaps another take away from today’s report: fiscal austerity [i.e. government spending cuts, i.e. “deficit reduction”] when the economy is already below-trend is not sound policy.
Jason L. Ware, MBA
Market Strategist, Chief Analyst
Albion Financial Group
(801) 487-3700; (877) 487-6200