The Economy Booms (While Shrinking)

The U.S. economy contracted 0.1% in the fourth quarter. This was the first quarterly GDP decline since the peak of the Great Recession in 2009.

What happened?

The headline is ugly, and it's raising fears that we're slipping back in a recession. But dig into the details, and there's a lot more than first meets the eye. This actually wasn't a bad report.

Consumer spending, which drives 70% of the U.S. economy, added 1.5 percentage points to GDP growth last quarter:

If the economy is contracting, you wouldn't know it, judging by consumers. They're still going strong.

Private investment was essentially flat during the quarter, hit by a big decline in inventories, which is always a volatile metric. Fixed investment -- investments in things like homes, buildings, machinery, cars, and software -- grew nicely during the quarter:

Net exports contributed 0.3 percentage points to GDP's decline, but that's not rare. As a country that has run a trade deficit every year for decades, net exports are almost always a small drag on growth.

So consumer spending was up sharply, total investment was flat, fixed investment boomed, and net exports weren't anything unusual.

Why was this such a bad report?

Blame Uncle Sam:

A slide in government spending sliced off 1.3 percentage points of growth in the fourth quarter as defense spending plunged. This was partially a calendar quirk, offsetting a third-quarter defense-spending surge, as the Bureau of Economic Analysis notes: "National defense decreased 22.2 percent, in contrast to an increase of 12.9 percent [in the third quarter]."

Have a look:

So add it up. If you exclude the plunge in defense spending, the economy would have grown 1.2% last quarter. The core drivers of the economy -- businesses investing and consumers spending -- are doing pretty well. This is how the economy booms while contracting.

GDP reports are always revised in subsequent quarters, too. Those revisions may be up or down, and there's really no way to predict the direction. But keep things in perspective: Profits are humming, housing is stabilizing, and the market is at a five-year high. Don't let one headline change your view.

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  • Report this Comment On January 30, 2013, at 11:25 AM, mingvest64 wrote:

    Morgan, always love your take on things. Bringing reason to the scaremongering headlines. Keep 'em coming and thanks.

  • Report this Comment On January 30, 2013, at 12:23 PM, jmbring wrote:

    agree with +mingvest64, thanks Morgan!

  • Report this Comment On January 30, 2013, at 1:29 PM, whereaminow wrote:

    Consumer spending does not drive an economy. That is the Keynesian view and it is incorrect. Many agree with the Keynesian view, as does the article author. They are free to agree with it, but they are wrong.

    Savings and investment drive an economy. Consumption that is not supported by the previous investments that lengthen the structure of production creates disequilibrium. The Keynesian focus on spending celebrates the disequilibrium process (hence cheering the boom times even though they are always unsustainable malinvestments... sounding familiar at all?)

    History is about to repeat itself. By focusing on spending, the monetary oligarchy has managed to usher in the early stages of another bubble (see housing prices yoy for example), which is completely unsustainable and does not reflect the subjective values of market participants.

    In other words, Keynesian solutions undermine the very price system they purport to remedy, as all prices are ultimately determined by the subjective ordinal rankings of market actors.

    The author is right in one respect. The slight contraction last quarter is not indicative of a coming recession, and plenty of data points point to a coming boom.

    The problem is that he and other Keynesians think the boom is a good thing.

    David in Liberty

  • Report this Comment On January 30, 2013, at 1:33 PM, toastedseeds wrote:

    As there will be a reduction in govt spending this year it is unlikely we will see a boom. We'll be fortuante, if the pols can be smart about the spending cuts and the revenue increases, to see a 1.5% gdp growth for this year and the next few.

    ts

  • Report this Comment On January 30, 2013, at 2:20 PM, sgt1917 wrote:

    Govt spending down? It's about time.

  • Report this Comment On January 30, 2013, at 4:45 PM, SkepikI wrote:

    This points out the flaw in just looking at GDP, and then doubling the mistake by equating GDP to the economy. Just try this thought experiment: what would happen if the Federal Government allocated an ADDITIONAL 1% of GDP to a big hole in the ground that it owned (you could model this as the "big dig" in Boston with roadblocks on either end so it cant be used -ha) and just shoved nominal $ into it, accounting for it as an expense. GDP would go up 1% and nothing would have been changed, no useful output would be created and we would not be better off one whit. Well, maybe we would be better off because some deflation might result from less money in circulation....

    But the point is GDP went up but the economic activity was relatively unchanged.

    The false presumption in govt spending adding to GDP is obvious, as is the practical fact that much of what we spend on government is wasted. SOME IS WORSE THAN WASTED because we fund crooks, scams and activities that should be penalized instead of funded...like A123, Solyndra, Revolt, Fast and Furious etc

    etc.

    But that point aside, Morgan, this is an outstanding think piece. Two corkers in a row, I am impressed. It also scares the pants off me, because we have a LOT more spending on wasteful, criminal and just plain crazy spending to excise from the currently least productive segment of our economy. I just don't see where either business or the consumer can take up the slack with more productivity and less "off target" activity. Government at all levels is the one area where the LEAST amount of productivity improvement and removal of unnecessary activity has taken place in the past 2 decades.

    If there is any hope at all of wringing the inefficiencies out of our economy now, most of it has to lie with the government... the hard part will be if GDP is suppressed to the point it sends us into another wave of recession..

  • Report this Comment On February 08, 2013, at 2:40 PM, RedScourge wrote:

    "A slide in government spending sliced off 1.3 percentage points of growth in the fourth quarter as defense spending plunged."

    Spending money you don't have isn't "growth", it's only the appearance of growth in the short term, at the expense of future growth. Every dollar the government spends is a dollar someone can't spend on real sustainable economic activity.

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