Q4 GDP Falls for First Time Since Recession Ended

Q4 GDP Falls for First Time Since Recession Ended

01/30/2013 BY: MARK LIEBERMAN, FIVE STAR INSTITUTE ECONOMIST

Battered by storms and droughts, real gross domestic product (GDP) fell 0.1 percent in the fourth quarter, the Bureau of Economic Analysis reported Wednesday. The decrease marks the first “negative growth” since the end of the Great Recession in mid-2009. Economists had expected a weak 1.0 percent growth compared with the 3.1 percent annualized growth rate in the third quarter.

For the full year, GDP rose 2.2 percent compared with an increase of 1.8 percent in 2011.

BEA, in reporting GDP—the broadest measure of the nation’s economy—“emphasized that the fourth-quarter advance estimate released today is based on source data that are incomplete or subject to further revision by the source agency.”

The GDP downturn does not automatically signal a return to recession, which is loosely defined as two consecutive quarters of negative growth. That said, in the six quarter recession, which began at the tail end of 2007, GDP fell in Q1 2008, but rose in the second before remaining negative for the next four quarters.

The first revision of Q4 data will be reported at the end of February.

The biggest hits to fourth quarter GDP came from a sharp drop in government spending, which fell 6.6 percent from the third quarter, primarily federal government spending, which dropped 15.0 percent quarter-to-quarter. Private investment fell 0.6 percent, primarily inventory investments and a fall-off in exports. Imports, which in GDP accounting are a subtraction from GDP, also fell, but not enough to offset the drop in exports.

Personal consumption expenditures—the largest component of GDP—grew 2.2 percent in the fourth quarter, faster than the 1.6 percent growth in the third. Non-residential fixed investment grew based on stronger investment in equipment; spending on non-resident structures fell 1.1 percent in the fourth quarter.

Residential fixed investment improved 15.3 percent in the fourth quarter, the strongest growth since the first quarter.

By the numbers, GDP fell $4.9 billion in the fourth quarter to $13.65 trillion. Personal consumption grew $51.8 billion and accounted for 70.9 percent of total GDP, up slightly from 70.5 percent in the third quarter.

Residential fixed investment in the fourth quarter was reported at $384.3 billion, up $13.4 billion from the third quarter. Residential fixed investment represented 2.8 percent of total GDP in the fourth quarter, up from 2.7 percent in the third quarter.

Government spending dropped $41.5 billion in the fourth quarter, led by a drop of $42.4 billion in defense spending from the third quarter. Defense spending in the third quarter was bulked up by end-of-fiscal-year spending. For the full year though, federal spending fell $23 billion including a $21.9 billion drop in defense spending reflecting the winding down of operations in Iraq and Afghanistan.

At the same time though, state and local spending dropped $2.5 billion in the fourth quarter.

Government spending represented 18.0 percent of GDP in the fourth quarter, down from 18.3 percent in the third.

Wednesday’s report was the “advance” report of GDP, the first of three GDP releases. BEA acknowledged it used estimates for some crucial inputs because only two months of data have been reported. In developing the advance estimate, BEA assumed an increase in inventories for non-durable manufacturing and wholesale and retail non-auto inventories. It also estimated a decrease in both exports and imports.

The report also used estimates to develop inventory investment data for farmers affected by the summer’s Midwest drought, which BEA said reduced farm inventory investment by about $24 billion in the fourth quarter. InGDP accounting, the reduction in inventory investment in the fourth quarter added to overall GDP because it was lower than the drop in inventory investment in the third quarter.

Superstorm Sandy, BEA said, resulted in losses of more than $44 billion in fixed assets—$35.8 billion in private assets and $8.6 billion in government assets. Offsetting those losses, BEA said, would be about $28.1 billion in insurance payments—$20.6 billion of private insurance payments and $7.5 billion from the National Flood Insurance program. Those payouts do not include recently passed government assistance programs.

BEA said though it could not estimate the storm’s impact on fourth quarter on GDP.

“Sandy,” BEA said, “made landfall on the New Jersey coast and caused major damage and disruption throughout the Northeast region. Like other disasters, Hurricane Sandy disrupted many types of production through closures of factories, offices, and transportation facilities, while causing certain types of production, such as emergency services and rebuilding activities, to increase. These effects on production are included, but not separately identified, in the source data that BEA uses to prepare the estimates of GDP; consequently, BEA is not able to provide an estimate of the overall impact of Sandy on fourth-quarter GDP.”

Hear Mark Lieberman Friday on P.O.T.U.S. radio, Sirius-XM 124, at 8:45 am and again at 11:45 am eastern time.

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