U.S. economic growth stalls

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Bad-Economy-sign

The news for the U.S. economy wasn’t good on Wednesday as domestic growth stalled. An increase in retail sales in the fourth quarter wasn’t enough to offset the biggest drop in government spending since 1973, according to the Wall Street Journal.

What’s interesting is that the major business media interpreted the results differently.

Here’s The Journal’s take on the matter:

U.S. economic momentum screeched to a halt in the final months of 2012, as lawmakers’ struggle to reach a deal on tax increases and budget cuts likely led businesses to pare inventories and the government to cut spending.

The nation’s gross domestic product shrank for the first time in 3 1/2 years during the fourth quarter, declining at an annual rate of 0.1% between October and December, the Commerce Department said Wednesday.

It was the first time the broad measure of all goods and services produced by the economy contracted since the recovery from the financial crisis began. Economists surveyed by Dow Jones Newswires had expected 1.0% annualized growth.

The decline reflects worries about the so-called fiscal cliff. The economy reversed from a 3.1% pace of growth in the third quarter largely because federal government spending fell by 15% and private business, likely fearing slack in demand, let inventories dwindle.

The New York Times took a more moderated approach at the beginning of their story, saying the indicators weren’t enough to push the economy back into a recession.

The drop in gross domestic product was driven by a plunge in military spending, as well as fewer exports and a steep slowdown in the buildup of inventories by businesses. Anxieties about the fiscal impasse in Washington also contributed to the slowdown, one reason stockpiles grew more slowly.

Despite the overall contraction, there was underlying data in the report suggesting the economy is not on the brink of a recession or an extended slump. Residential investment jumped 15.3 percent, a sign that the housing sector continues to recover, for one. Similarly, investment in equipment and software by businesses rose 12.4 percent, an indicator that companies are still spending. Although economists expected output to decline substantially from the 3.1 percent annual growth rate recorded in the third quarter, the negative number still caught Wall Street off-guard. It was the weakest economic report since the second quarter of 2009.

“I’m a little surprised,” said Michael Feroli, chief United States economist at JPMorgan. “It grabs your attention when you have a negative number across everyone’s screens.”

Stocks were down only slightly in early trading on Wall Street, as some traders shrugged off the unexpected drop.

Mr. Feroli had been expecting growth to come in at 0.4 percent, which was well below the 1.1 percent consensus among economists on Wall Street. Like some other observers, Mr. Feroli said there were hints the economy was performing slightly better than the headline number suggested.

The 22.2 percent drop in military spending – the sharpest quarterly drop in more than four decades – along with the drop in inventories and exports overwhelmed more positive indicators in the private sector, he said.

For example, final sales to private domestic purchasers, which strips out government spending as well as trade and inventories, rose by 2.8 percent. “Consumers and businesses kept spending at a pretty steady pace,” Mr. Feroli said. “There was a lot of noise that moved the headline around.” For the entire year, the economy grew by 2.2 percent, a slight improvement from the 1.8 percent annual rate in 2011.

Bloomberg points out there was some good news for durable goods, especially auto manufacturers.

Consumer spending, which accounts for about 70 percent of the economy, expanded at a 2.2 percent annual rate last quarter, up from 1.6 percent in the previous three months, today’s report showed. Purchases of durable goods, including automobiles, climbed at a 13.9 percent rate, the most in two years.

Cars and light trucks sold at a 15.3 million annual rate in December after a 15.5 million pace the prior month, the best back-to-back showing since early 2008, data from Ward’s Automotive Group showed earlier this month.

A jump in pay may have helped consumers. After-tax income rose at a 6.8 percent annual rate from October through December, the biggest increase since the second quarter of 2008, today’s report showed.

In addition to improving wages and salaries, some companies also paid dividends and employee bonuses earlier than usual before tax rates went up this year. The Commerce Department estimated that about $26.4 billion of the increase in incomes was attributable to early dividend payments and another $15 billion reflected bonuses and other types of irregular pay.

The gain in consumer spending may be difficult to sustain this quarter as a tax increase takes a bigger chunk from earnings. Congress on Jan. 1 let the payroll tax revert to 6.2 percent from 4.2 percent while avoiding broad-based income tax increases. Lawmakers are now wrangling over spending reductions scheduled for March 1 that threaten to further slow the economy.

While the market was down slightly, it didn’t see the huge sell-off that news like this can sometimes bring, indicating that traders and money managers aren’t expecting a huge economic decline. Let’s hope they’re right.