U.S. GDP Contracts in 4Q – What’s the real story?

  • Posted on: 9 December 2015
  • By: admin

U.S. GDP Contracts in 4Q – What’s the real story?

U.S. gross domestic product (GDP) contracted by 0.1% in the 4th quarter of 2012 versus the same period in 2011, below the expectation for 1% growth. This was the first contraction since 2Q09. You can read a recap at http://www.businessinsider.com/us-advance-q4-gdp-2013-1

Why You Should Care

Although we never want to see a contraction in GDP, the initial 4th quarter report is stronger than the 0.1% decline would have you believe. Two main factors are to blame for the negative number, the reduction of inventory and government spending cuts. On the inventory side, businesses built up inventories in 3Q12 but reversed course in 4Q12 which lowered GDP by 1.1%. Additionally, cuts in government spending, namely a 22% decline in defense spending which was the worst decline since 1972, chopped another 1.3% from growth.

If you look at the main driver of the economy, consumer spending, we actually saw acceleration of growth to 2.2% from 1.6% last quarter. Additionally, business investment grew by 9.7%.

So, all in, while a contraction in GDP isn’t what we want to see, if you look under the hood of the announcement you find a stronger economic picture that may actually be gaining momentum.