The Bureau of Economic Analysis revised its real gross domestic product (GDP) estimates up from the previously released -0.1 percent to +0.1 percent growth in the fourth quarter of 2012. While this suggests that the U.S. economy eked out some slight growth last quarter, it also means that the economy was essentially flat.
Economists have assumed that real GDP would be revised higher – with consensus estimates of around 0.5 percent – since the higher-than-anticipated export numbers were released earlier in the month. Both exports and imports declined between the third and fourth quarters, with exports down at a faster pace. The contribution from net exports shifted from subtracting 0.25 percentage points to adding 0.24 percentage points between the first and second estimates. This was obviously helpful in lifting the GDP estimate.
Much of the rest of the story did not change much from the first GDP estimate, which was released at the end of January. The largest declines came from lower spending on inventories and from sharply reduced defense spending. The latter was the result of two things: (1) higher-than-normal end-of-fiscal-year spending on defense in the third quarter which was unlikely to be repeated, and (2) the threat of across-the-board federal spending cuts (or “sequestration”). As a result, defense spending fell 22.0 percent in the fourth quarter, more than offsetting the 12.9 percent increase in the third quarter. Total government spending – including at the federal and state and local levels – subtracted 1.38 percentage points from real GDP. This was larger than the original estimate of 1.25 percentage points.
At the same time, businesses spent less on inventory replenishment in the fourth quarter. Part of this was expected, as firms had already spent large amounts on inventories in the third quarter, helping to boost real GDP in that quarter. In the fourth quarter, though, the decline in inventory spending reduced real GDP by 1.55 percentage points, larger than the original estimate of 1.27 percentage points.
Outside of these two areas, there were some signs that consumers and businesses were increasing their spending modestly. Personal consumption rose 2.1 percent for the quarter, with spending on durable goods (particularly motor vehicles) up significantly. Spending on durable and non-durable goods added 1.03 percentage points to real GDP. Meanwhile, residential and nonresidential fixed investment numbers were also much higher, adding 1.36 percentage points to real GDP. Continued gains in the housing sector and increases on equipment and software were largely behind the positive growth in fixed investment.
The good news was the real GDP shifted from negative to positive growth at the end of the year. This was expected because of stronger trade numbers. But, aside from that, not much changed in the analysis of the country’s growth at the end of 2012. The threat of sequestration – which still exists, with the new deadline for these cuts to take effect to tomorrow – produced a sharp decline in defense spending, with manufacturers in that sector pulling back on activity. Given the current conversations about the fiscal situation, we would expect for government spending to continue to be a drag on growth for the foreseeable future.
It is possible to look at this data with a glass-half-full posture. If you look just at consumer spending and business fixed investment, there were modest gains in growth, and the two components alone would have added 2.83 percentage points to real GDP.
Moving forward, growth in the first quarter should benefit from continued growth in the consumer and business segments, but with the fairly large caveat of higher payroll taxes and increased uncertainties related to fiscal policy. Real GDP is expected to grow between 2.0 and 2.5 percent in 2013.
Note that the second revision of fourth quarter real GDP, which should include even more complete data, will be released on Thursday, March 28. The initial estimate for first quarter 2013 real GDP growth will be out on Friday, April 26.
Chad Moutray is chief economist, National Association of Manufacturers.
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