US Economy Stagnant in Fourth Quarter of 2012

The weakness of GDP in the fourth quarter was not entirely unexpected. The Economist Intelligence Unit had expected growth to be sluggish, especially compared with a strong expansion of 3.1% (annualised) in the third quarter. Yet, it seems that two one-off effects that boosted third-quarter growth—inventory building by businesses and a federal spending boost—flipped back sharply in the final quarter of the year. A large fall in inventories subtracted 1.27 percentage points from growth in the fourth quarter, after adding 1.11 percentage points in the third quarter. Likewise, federal defence spending subtracted 1.28 percentage points from the GDP growth rate in the final quarter, declining by a huge 22.2% on an annualised basis. Defence spending contributed 0.64 percentage points to growth in the third quarter. These two components tend to be volatile anyway, but their impact seems to have been particularly strong (and combined) in the fourth quarter. Final sales to domestic purchasers, a wider measure of domestic demand, showed a stronger outcome, rising by 1.3% in real, or inflation-adjusted, terms and by 2.7% in nominal dollars, suggesting that the underlying economic recovery remains generally on track. Indeed, this first estimate of a 0.1% contraction will be revised by the government statistics agency in its next two releases, and there is a good chance that the eventual GDP growth outcome for the fourth quarter will be mildly positive as more data becomes available, especially for the final month of the quarter.

Private consumption and business investment continued to grow solidly, despite "fiscal cliff" uncertainty

The underlying trend for more important and more stable GDP components was better than the headline figure suggests. Although the overall economy contracted fractionally in the fourth quarter, private consumption (which accounts for some 70% of overall GDP) grew by an annualised 2.2%, driven by a 13.9% expansion in durable goods purchases. Strong car sales, which reached a new post-crisis high in the fourth quarter, were a major contributing factor. The willingness of consumers to make large purchases, such as passenger vehicles, is positive for the prospects of household spending and for the wider economic recovery. Jobs growth also continued at a moderate but sustained pace in the fourth quarter, and personal income made further advances. We expect private consumption to weaken in the first half of 2013, however, given an increase in the payroll tax starting in January—a previous 2-percentage-point temporary cut was allowed to expire. Indeed, consumer confidence fell sharply in January, according to the Conference Board index measure, to a reading of 58.6, from 66.7 in December. Nonetheless, US consumer spending continues to look solid overall; it rose by 1.9% for 2012 as a whole.

Real GDP by expenditure
(% period-on-period change at seasonally adjusted annualised rates, unless otherwise indicated)
	2011			2012
	3 Qtr	4 Qtr	Year	1 Qtr	2 Qtr	3 Qtr	4 Qtr	Year
Private consumption	1.7	2.0	2.5	2.5	1.5	1.6	2.2	1.9
Government consumption & investment	-2.9	-2.2	-3.1	-3.0	-0.7	3.9	-6.6	-1.7
Private fixed investment	15.5	10.0	6.6	9.8	4.5	0.9	9.7	8.5
Private non-residential investment	19.0	9.5	8.6	7.5	3.6	-1.8	8.4	7.7
Private residential investment	1.4	12.0	-1.4	20.6	8.4	13.6	15.3	11.9
Stockbuilding^a	-1.1	2.5	0.16	-0.4	-0.5	0.7	-1.3	-2.3
Domestic demand (final sales)	2.2	2.1	1.8	2.2	1.4	1.9	1.3	1.9
Exports of goods & services	6.1	1.4	6.7	4.4	5.3	1.9	-5.7	3.2
Imports of goods & services	4.7	4.9	4.8	3.1	2.8	-0.6	-3.2	2.5
GDP	1.3	4.1	1.8	2.0	1.3	3.1	-0.1	2.2
^a Contribution to GDP growth in percentage points.
Source: Bureau of Economic Analysis.

Business investment rebounded nicely in the fourth quarter. Non-residential investment had previously decelerated for four straight quarters, and even recorded a slight decline in July-September. We had been concerned that the approach of the "fiscal cliff" at end-2012—a series of planned tax rises and spending cuts that threatened to push the US back into recession—would deter firms from investment as long as uncertainty about fiscal policy prevailed. Yet, in the event, non-residential investment spending rose by 8.4% at an annual rate. Businesses still remained cautious about investing in buildings; spending on structures fell by 1.1% in the fourth quarter. By contrast, investment spending on equipment and software jumped by 12.4%, lifting overall non-residential investment.

Residential construction registered another strong quarter, continuing its striking recovery in 2012 from a five-year period of contraction. Housing investment grew by 15.3% (annualised) in the final quarter and by 11.9% for the year as a whole. Housing indicators suggest that the residential construction revival carried significant momentum into 2013: housing starts hit 954,000 (at an annualised rate) in December 2012, some 56% above the 2011 level. House prices were up too; according to the S&P/Case-Shiller national index, they rose by 5.5% year on year in November. Investment spending is a crucial driver of the continued economic recovery, and the evidence from the fourth quarter is encouraging in that respect. That said, despite businesses' resilience ahead of the fiscal cliff, there is more uncertainty about scheduled sharp federal spending cuts from March 2013 onwards, and this may lead firms to remain cautious over new investment until the second half of 2013.

GDP growth is expected to accelerate in the second half of 2013 after a soft first half

GDP grew by 2.2% for all of 2012, up from 1.8% the year before. Nominal GDP growth was particularly stable, recording 4% growth in both years. Our expectation is that economic expansion will remain relatively stable in 2013 in a year-on-year comparison, at 2.1%, but that growth in the second half will be much stronger than in the first half. Already-agreed tax rises at the beginning of 2012 will weigh on private consumption in coming months, and sharper federal spending cuts may kick in from March onwards. Congress may not be able to reach a deal to moderate these spending reductions. Firms and consumers certainly shrugged off the prospect of this fiscal tightening in late 2012, but its negative impact on GDP will be hard to avoid in the first six months of 2013. In the light of this, the Federal Reserve (the central bank) is expected to continue its asset purchase programme throughout the year to maintain an accommodative monetary policy and sustain the recovery through a more uneven period. Generally, though, the economic recovery remains on track, despite the latest data suggesting the first (minor) GDP contraction since the second quarter of 2009.

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