USA Inc. Doesn't Care About the Fiscal Cliff

Investors did not take kindly to today's negative surprise on fourth-quarter GDP (see below), sending the S&P 500 (SNPINDEX: ^GSPC  ) down 0.4%, while the narrower, price-weighted Dow (DJINDICES: ^DJI  ) lost 0.3%. The decline in economic activity stoked dormant fear concerning the ultimate impact of the fiscal cliff on economic activity; the VIX Index (VOLATILITYINDICES: ^VIX  )   Index rose 7.6%, to close above 14 for the first time since Jan. 3.

Do as I do, not as I say
What a nasty surprise! It turns out the U.S. economy shrank at a rate of 0.1% in the fourth quarter -- the consensus forecast called for growth of 1.1%. Were companies the culprit? Did they scale back business investments? When investment bank Goldman Sachs published its S&P 500 Beige Book at the beginning of November, the report indicated that the fiscal cliff was one of the top three concerns that companies cited in their third-quarter conference calls. Dow components McDonald's, General Electric, and JPMorgan Chase specifically pointed to the associated uncertainty as an impediment to corporate planning.

In fact, the data suggests the cliff didn't stop companies from spending. The BEA's report shows business investment in equipment software jumped 12.4% in the fourth quarter -- the third largest increase since mid-2009. At large-capitalization companies, there is no indication that companies were unwilling to invest: If we take the 108 S&P 500 companies for which fourth-quarter data is available, the ratio of capital expenditures to revenues for the entire group -- 6.1% -- is equal to the median value for the past five December quarters. In the fourth quarter of 2011, the ratio was 6%.

Does this mean that companies don't care about the fiscal cliff? No --the issue is still alive, as automatic, across-the-board spending cuts have simply been pushed back to the beginning of March. It's entirely conceivable that this could have an impact on capital expenditures in the current quarter and beyond. And that's before we even consider the potential impact on government and consumer demand. However, this is a good illustration that what companies say and do aren't always consistent. When in doubt, trust the data.

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