The news that the government thinks the economy shrank in the fourth quarter looks like a disaster — but it’s not.
The Commerce Department reported Wednesday that the economy shrank at an annual rate of 0.1% in the final three months of 2012 — but that number was dominated by two temporary factors, as the Pentagon slashed spending 22% and businesses sharply slowed the rate of inventory accumulation.
Each took 1.3 percentage points off the number, says IHS Global Insight economist Nigel Gault. A drop in exports, which reflect a short-term slowdown in Asia and Europe’s ongoing problems, also cut into U.S. growth, Moody’s Analytics chief economist Mark Zandi said.
Adjusting for those factors leaves growth around 2.5% — not far from where it was in the third quarter. The third quarter got a benefit as businesses built up inventories and defense spending rose 13%, pushing the GDP number to 3.1%.
The government’s estimate Wednesday is only its first for the fourth quarter last year. The Commerce Department will make two more estimates in February and March and they could be revised upward as more data come in.
When you get into the core of the economy — consumer spending and business investment — the recent pattern of slow improvement is still there. That;’s bolstered by Wednesday’s news from payroll processor ADP that private companies added a better-than-expected 192,000 new jobs in January.
Indeed, both Gault and Zandi said Wednesday that they will raise their estimates for first-quarter growth based on the latest GDP report. While defense spending is set to fall as part of federal budget-cutting, it won’t drop as sharply as it did in late 2012. Inventories should bounce back and contribute to growth again in early 2013, both said.
None of this means the economy is booming. The expiration of the payroll tax holiday on Jan. 1 may cool consumers. The rate of job growth means unemployment, now 7.8%, will only fall to a still-to-high 7.3% by year end, Zandi said.
But you can think of this as a Star Spangled Banner day for the economy. The fiscal cliff was the rocket’s red glare. The tax increases and spending cuts coming into the economy now are the bombs. But the recovery is still there.
Source: Usatoday.com