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Brian Jacobsen

Fourth-quarter gross domestic product: A negative isn't that negative

AdvantageVoice® Blog—1-30-13
Brian Jacobsen, Ph.D., CFA, CFP®, Chief Portfolio Strategist

Fourth-quarter gross domestic product (GDP) decreased at an annual rate of 0.1%. For all of 2012, real GDP increased 2.2%, compared to a 1.8% rate in 2011. Economy-wide inflation stayed subdued throughout 2012.

This was the advance estimate from the Bureau of Economic Analysis (BEA), which will be subject to two more revisions within the next couple of months as more data become available. It will then be subject to another revision in the summer and then again in a few years. So we really have no idea what the exact GDP number is. As Russ Roberts, now at the Hoover Institution, once said, “You can tell economists have a sense of humor: They use decimals.”

There wasn’t anything too shocking in the GDP report, but here are a few observations:

  1. Inventory growth slowed. That’s a negative for GDP growth calculation, but it might not be a bad thing for future economic growth. That’s why I tend to look at real final sale of domestic production, which ignores the inventory component. That increased at a 1.1% annualized rate in the fourth quarter, compared to a 2.4% annualized rate in the third.
  2. Federal government spending subtracted from GDP growth. National defense was the big detractor as spending decreased 22.2%. Nondefense investment spending increased 1.4%. The sequester, which looks almost unavoidable, may further slow defense spending. Of course, defense spending was scheduled to slow as U.S. troops withdraw from Afghanistan. We’ll have to watch events in the South China Sea and the Middle East to see if there will be a redeployment of troops, which will probably require an acceleration of defense spending, regardless of the sequester. Some people might argue that the decline in growth of government spending could be a good thing for the private sector of the economy.
  3. Exports of goods and services decreased 5.7%. That subtracted from GDP growth. A stronger dollar versus the yen isn’t likely helping much, but that’s a relatively recent phenomenon. The dollar’s strength versus the euro may be helping U.S. exporters vis-à-vis European competitors, but this shows that a weak currency by itself doesn’t do much good if your customers are poorer and cutting back on spending. The easing of austerity in Europe could help turn the export picture around.
  4. Durable goods spending by consumers increased 13.9%. This, I think, could reverse in the first quarter. The payroll tax cut holiday expiration means workers will adjust to a lower level of take-home pay. This will likely result in a lowering of the savings rate and lower spending on durable goods (items expected to last three years or longer). Consumers will, ultimately, do what they do best: consume. But the first quarter of 2013 will be a transition period.
  5. Residential fixed investment (basically, homes) increased 15.3%. The Fed’s low interest rate policy is helping housing. Interestingly, keeping rates too low for too long can make people lazy, thinking that they can afford to wait to refinance or buy a home. Expectations may shift such that people think rates may begin to rise at the end of 2013 when the Fed may stop buying mortgage-backed securities hand over fist. That could instill a sense of urgency in potential home buyers to stop being potential buyers and become actual buyers.
  6. Equipment and software spending increased 12.4%. Part of that could have been due to the uncertainty as to whether the bonus depreciation on that type of investment would expire at the end of 2012. Now that it has been renewed for 2013, there could be a pause in this type of investment (companies may have shifted spending from 2013 Q1 to 2012 Q4), but I expect it will again pick up. Investment spending still needs to catch up to new technology. Not only did the 2000 to 2007 period have a dearth of investment spending on equipment and software (everyone was buying homes and buildings), but the technology lifecycle is much shorter now than it ever has been. Technology becomes obsolete much more rapidly, which requires a reinvestment just to stay competitive.

While the headline number on GDP was negative, I don’t think it was that shocking or that negative.

The views expressed are as of 1-30-13 and are those of Chief Portfolio Strategist Brian Jacobsen, Ph.D., CFA, CFP®, and Wells Fargo Funds Management, LLC. The information and statistics in this report have been obtained from sources we believe to be reliable but are not guaranteed by us to be accurate or complete. Any and all earnings, projections, and estimates assume certain conditions and industry developments, which are subject to change. The opinions stated are those of the author and are not intended to be used as investment advice. The views and any forward-looking statements are subject to change at any time in response to changing circumstances in the market and are not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally, or any mutual fund. Wells Fargo Funds Management, LLC, disclaims any obligation to publicly update or revise any views expressed or forward-looking statements.

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