The Bureau of Economic Analysis announced that real gross domestic product (GDP) declined 0.1 percent in the fourth quarter of 2012. This was well below the consensus estimate of just over one percent, and it was the first quarterly decline in real GDP since the second quarter of 2009.
In short, these figures illustrate the significant weaknesses in the U.S. economy as we ended last year, with slowdowns from Hurricane Sandy and uncertainties related to sales and the fiscal cliff paramount in manufacturers’ minds.
At the same time, consumer spending continued to grow modestly, up 2.2 percent for the quarter and contributing 1.52 percentage points to real GDP. In terms of goods consumption, there was a robust increase in durable goods spending, particularly for motor vehicles, and durable goods consumption alone added 1.02 percent to growth. Nondurable goods spending was up more slowly, adding just 0.06 percent to real GDP. This data is largely supported by other data, including industrial production numbers, which have shown the auto sector recovering from some of its autumn woes, with other sectors more mixed, but largely improving.
The negatives in today’s real GDP report included the data on inventories, government spending, and exports. There was a sharp drop in nonfarm inventories in the fourth quarter, offsetting the gains seen in the previous quarter. Private inventories subtracted 1.27 percentage points from growth. Consistent with surveys (including the NAM/IndustryWeek one) showing businesses pulling back on hiring and capital spending, nonresidential spending on structures declined 1.1 percent in the fourth quarter after being flat in the third quarter. This contrasts with other elements of private domestic investment, including continuing good news on residential construction and higher spending on equipment and software.
While we have some progress of late in some economies worldwide, it is clear that manufacturers continue to face significant headwinds in selling their goods overseas. Indeed, goods exports fell 7.9 percent in the fourth quarter, the first decrease in 14 months. This has been reflected in sentiment surveys which indicated contracting levels of export sales at the end of last year. Overall, exports subtracted 0.81 percentage points from real GDP, but with an increase in imports, net exports ended up deducting a smaller 0.25 percent from growth.
The other figure to decline significantly was federal defense spending, which had a large increase in the third quarter due to end-of-fiscal year appropriations. Not surprisingly, this fell sharply in the fourth quarter, down 22.2 percent. Still, the decline more than offset the 12.9 percent rise in the previous quarter, and it is clear that worries about defense sequestration took a toll in this sector. Federal government expenditures – wholly the result of lower defense spending – subtracted 1.25 percentage points from real GDP.
In summary, today’s GDP numbers confirm that the U.S. economy was struggling at the end of the year, with growth essentially stalled. Manufacturers have been worried about slowing sales, and they were frustrated with the political process. The fiscal cliff debate – and the possibility that going off the cliff could lead to an economic downturn – caused many of them to pull back on hiring and capital spending.
At the same time, headwinds overseas challenged exports, and the threat of budget sequestration caused major headaches for businesses, especially those in the defense supply chain. Those worries continue with the sequestration deadline pushed back to March 1, 2013.
Consumer spending rose modestly, housing continues to be a bright spot, and business investment in equipment and software recovered from weaker data the quarter before. Some of these trends should continue; although, consumer spending will probably ease in the first quarter due to higher taxes and less disposable income. We have also seen some progress overseas, which should help exports.
Moving forward these GDP figures should serve as a warning for policymakers that uncertainties in the marketplace are not a recipe for growth. With Washington continuing to kick the can down the road and future debates over the budget just weeks away, manufacturers remain far from settled in their economic outlook for 2013.
Chad Moutray is chief economist, National Association of Manufacturers.
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