George F. Will once wrote, “All economic news is bad news. All economic news is good news.” Today’s GDP report has lots of both and has already sown a lot of confusion. Real GDP fell in the last three months of 2012, indicating a recession (although the drop was only 0.1%). Part of the decline came from reduced inventory investment, i.e., from companies not producing as many goods that haven’t been sold yet. So far, so bad.
The biggest decline came in government spending; in particular, military spending dropped a whopping 22%. Why? The Washington Post’s Brad Plumer says it has something to do with the drawdowns in Iraq and Afghanistan and apparently also with the various budget games that the Pentagon and other government agencies play, as regards the timing of the fiscal year and the “sequester” budget cuts that could come if Congress fails to raise the debt ceiling. One thing I learned from Plumer’s piece is that, although the 22% drop is unusually large, it’s not unusual for defense spending to drop in a particular quarter. It did so in about half of the twelve quarters from 2010 on; the second-largest drop was almost 15%.
Many people would view the big reduction in military spending as a good thing — the wars are unpopular, and some studies have found that, dollar for dollar, domestic government spending tends to create more jobs than does military spending. Aside from military spending, real GDP rose in the last quarter of 2012, by 1.3%.
Is 1.3% good? Of course not. It makes 2012:IV one of the weaker quarters of the past two years, in which the economy’s average annual growth was 2.0%. The economy grew at 3.1% in the third quarter of 2012, so this is a step backward at least in a relative sense.
But positives are not hard to find in the GDP report. Thus Bloomberg’s headline “Growth Stall Obscures Consumer, Business Pickup.” Consumer spending grew at a decent 2.2% clip, up from 1.6% in the third quarter. Rising auto sales were a big part of the increase (which sounds about right to someone like me who bought a car for the first time since 1999). I would guess that some of the slippage in inventory production was simply due to consumers buying more goods than anticipated, with the result that inventories were down. (If inventory production had not fallen, then GDP would have grown by 2.6%, according to the Bloomberg article.) The best news of all was probably on the housing front, where residential construction (counted in the “Investment” part of GDP) grew by 15%. For 2012 as a whole, housing construction rose 12%, its biggest increase since 1992.
The markets seem to have to shrugged off the report. Market participants may doubt that the increased consumer spending and construction are sustainable. Right now, five hours after the release, the Dow, S&P 500, and Nasdaq averages are basically unchanged (within 0.05% of yesterday’s close).