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GDP shrinks, but news not as bad as it seems

by Nicole Marsh
Jan 30, 2013


Nicole Marsh/MEDILL

U.S. gross domestic product underperformed even the most conservative expectations in the fourth quarter.

The U.S. economy unexpectedly shrank in the fourth quarter, with the GDP falling dramatically short of economist forecasts. However, the numbers were largely skewed due to cuts in defense spending and low inventory accumulation.

“Absent these two factors the rest of the economy expanded at a relatively decent 2.5 percent pace last quarter,” JPMorgan Chase and Co. Chief Economist Michael Feroli said in a research note.

Real gross domestic product contracted at an annualized rate of 0.1 percent, according to a report from the Bureau of Economic Analysis. The decline was substantially lower than the 1.1 percent increase economists surveyed by Bloomberg were expecting. In the third quarter, real GDP increased 3.1 percent.

The government’s real GDP estimate is only the first for the fourth quarter. The Commerce Department plans to revise the numbers twice over the next two months as more data accumulates.

A 22.2 percent annualized drop in defense spending and a decrease in inventory accumulation primarily influenced the disappointing fourth quarter output.

“Special factors clearly exacerbated the weakness that we saw in the fourth quarter; we should see some bounce back in overall growth, now that those factors have abated and are working in the other direction,” Mesirow Financial Holdings Inc. economist Diane Swonk said in a blog post.

The drop in defense spending – the biggest plunge in four decades – was due to the pullback from wars in Iraq and Afghanistan as well as a decrease in research and development and weapons testing, Swonk said.

A drag of farm stocks in the wake of last summer’s drought is a likely cause for lower inventories, subtracting 1.27 percentage points from the change in total output.

Consumer spending increased 2.2 percent, largely due to increased auto sales, and capital spending, including equipment and software, surged 8.4 percent. In the third quarter, consumer spending grew 1.6 percent, and capital spending decreased 1.8 percent. Both fourth-quarter increases are signs that the economy is actually fairly well positioned heading into the first quarter of 2013.

Economists say fiscal challenges are likely to remain unresolved for a while, and Europe will take time to rebound. However, excluding unusual factors, the economy shows signs of gradual, steady growth.

“The current quarter, it will face its own challenges, particularly from our ‘leaders’ in Washington, but there is nothing in the data that points to the economy being in recession or going there anytime soon,” Regions Financial Corp. Chief Economist Richard Moody said in a research note.

The Dow Jones industrial average fell 44 points, or 0.3 percent, to close at 13,910.42.