Why Today’s GDP Report Isn’t As Bad As It Looks

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Lucas Jackson / Reuters / REUTERS

Tug boats maneuver cargo ships, one of which is onto their docks in Bayonne, N.J., on Aug. 24, 2011.

The American public (or at least those of us who keep up on the latest macroeconomic data) awoke to some startling news this morning: According to initial estimates from the Commerce Department the American economy actually shrank in the fourth quarter of 2012. Yes, you read that right — not the sluggish growth we’ve been used to since the end of the 2008-2009 recession, but an honest-to-goodness contraction of 0.1%. Predictably, political pundits on the right had a field day – can you blame them? — using the data as evidence of the failure of the “Obama economy.” On Wall Street however, the markets have more or less been shrugging off the news, with the Dow down a slight 0.07% in morning trading. So what’s the deal?

In short, if you take a deeper look into the report, it’s not as bad as the headline number suggests. The biggest factors driving the contraction were a big drop in defense spending, which as The Washington Post explains is most likely related to the Defense Department preparing for the large cuts to its budget which were supposed to go into effect January 1, but have been postponed for a couple months as part of the fiscal cliff deal. (This should also provide an object lesson in the effects of government spending cuts on near-term GDP growth.) The other main factor dragging down the headline number was a decline in business inventories, which is likely just a reaction to firms working off inventory buildups from the previous two quarters.

Other numbers, meanwhile, including consumer spending, non-residential fixed investment (a fancy term that describes non-residential buildings or business equipment), and residential fixed investment (home building) were strong. This suggests that businesses and consumers are still feeling relatively good about the economy, and they are slowly increasing their spending in a way that is indicative of a slow-but-steady recovery.

In addition, estimates on GDP growth from the Commerce Department are just that — estimates, and they can often be pretty far off, especially if other indicators in the economy don’t validate their claims. As economist and Brookings Institute Senior Fellow Justin Wolfers described in a note to the press:

Overall, there’s nothing in today’s GDP report to change my view: The US economy was doing OK — maybe even pretty well — but definitely not great in the final quarter of 2012.  While this morning’s negative growth number is an attention grabber, realize it’s for last quarter, it’s an early guess, and it’s contradicted by most other data which point to an economy that is still growing, although perhaps not fast enough.

Wolfers ended with a sarcastic trivia question: “When is the last time that the first big hint of bad economic news came from an advance GDP report?  Answer: Never.” In other words, GDP reports are great for figuring out what went wrong with an economy looking backwards, but they aren’t good at predicting recessions. If we were in a recession, we’d know it, and not because of a report from the government.

That is not to say that all is hunky dory with the economy. Growth remains far too slow to pull us out of the deep hole in employment, or pull us back in line with the full productive capacity of our economy. Even without the drag on growth that government spending cuts have been putting on the economy, we’re still nowhere near the sustained run of 4% or so GDP growth that the American economy needs to quickly escape from its doldrums.

In other words, if you’re so inclined to blame a political figure or party for our lame economy, go right ahead. We still have a lame economy. But at least it’s not one that’s headed for recession in the near term.

11 comments
BryanPatrickBarnard
BryanPatrickBarnard

Quick! Lets do what Europe did! Lets initiate a self imposed economic depression in order to balance the budget in a time of record low interest rates!!!

rjsigmund
rjsigmund

re: "big drop in defense spending, which  is most likely related to the Defense Department preparing for the large cuts to its budget which were supposed to go into effect January 1"

that's what everyone said about the big jump in defense spending in the 3rd quarter...cant have it both ways...why dont you just report what happened & quit making up reasons if you dont know?

Christopher_Matthews
Christopher_Matthews moderator

@rjsigmund The Defense Department's fiscal year ends in September. If you don't spend your allotted budget by that time, you lose the money. That explains the run up in spending in the third quarter. Starting in October, the Defense Department was in a new fiscal year, in which it was preparing for likely budget cuts -- so it cut its spending in a big way. 

Leftcoastrocky
Leftcoastrocky

"Politicians: Don't do any more deficit reduction. When consumers are this glum, austerity economics is particularly dangerous.


If the next showdowns over the fiscal cliff, government appropriations, and debt ceiling result in more deficit cuts this year, we're in a recession."

kfbaxter
kfbaxter

I think were in for more bad news.  The real unemployment is around 14%, taxes have just gone up. Gov't spending is slightly up.  There will be less consumer spending during the next 3 months.  I guess we could do another stimulus that won't work because most of the last one was used for pet projects and keeping union members in their State Gov't jobs.  Most on the admistration and congress never had to make a payroll and don't know what it is like to run a business.  I think were screwed.

rmusic6914
rmusic6914

The consumer just took a 2% cut in pay, the holidays are over and the December credit card bills are in the mail.  Obamacare is causing employers to cut back on hirings and on hours.  The government is out of money and NO BODY will approve more stimulus debt.  The outlook for the second quarter is for more "surprising" numbers!

dsny59
dsny59 like.author.displayName 1 Like

Thanks, Matt. It's good to have perspective from the political left (yours) as well. Let's continue quantitative easing, print more money, and have the government spend more money, so ultimately we get an object lesson in how create long-term damage to the economy, to be eventually reflected in GDP.  


Christopher_Matthews
Christopher_Matthews moderator like.author.displayName like.author.displayName 2 Like

@dsny59 It's not at all controversial to say that cutting government spending will shrink GDP in the near-term. Government spending is a main component of GDP, so unless the cut in government spending is accompanied by an increase in consumption, investment or exports, you'll see GDP decrease. This is not an argument for large or small government (if our only goal was to boost short term gdp, we could just borrow and spend as much money as logistically possible), just an explanation of the statistic.

Throckmorton09
Throckmorton09

Q:  How many expert economists does it take to predict our future?

A:  Who knows?  We're not even looking in the right direction.

Let's just blame the slowdown on a serious lack of government spending.  Or should I say government borrowing...


Kasirith
Kasirith like.author.displayName 1 Like

We'll never be able to grow until we revise our horrendous digital patent laws that are completely stifling innovation and creation, especially on the digital front. You just can't compete with foreign companies when American businesses are wasting money fighting patent cases against holding companies that do nothing but sue other companies who make a product.