Heading into the report, the WSJ Economists' GDP Forecasts were
+1.6% for Q4 2012 and +1.7% in Q1 2013.
"Shocking" Contraction
The GDP report was a shocker, coming in at an annual rate of negative 0.1%.
Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- decreased at an annual rate of 0.1 percent in the fourth quarter of 2012 (that is, from the third quarter to the fourth quarter), according to the "advance" estimate released by the Bureau of Economic Analysis. In the third quarter, real GDP increased 3.1 percent.
Choice Comments From Consumer Metrics
Rick Davis at Consumer Metrics had some choice comments via email (also in the preceding link).
We have mentioned before that the BEA is notoriously poor at recording turning points in the economy in "real time." The first quarter of 2008 was a classic example, initially being reported in "real time" as yet another quarter of sustained growth before being revised downward several times over some 40 months to become the first quarter of contraction leading into what we now call the "Great Recession." We fully expect that ultimately the surprising economic upturn seen in the 3Q-2012 data will largely vanish in future revisions.Real GDP
It is hard to look at these new numbers without at least some cynical thoughts about the reported numbers for the prior quarter. We were frankly astonished when the final numbers for the third quarter came in at a 3.09% "full recovery" growth rate, driven largely by unexplained increases in Federal spending, particularly in the Department of Defense (DOD) -- the timing of which was completely controlled by an Administration in serious need of positive pre-election economic headlines. The annualized rates of growth for defense spending rose to over 15% in 3Q-2012, only to magically reverse to a -15% annualized contraction rate in 4Q-2012 -- after the polls had closed.
To that last point: arguably the DOD was simply moving materiel acquisitions forward in anticipation/avoidance of "fiscal cliff" sequesters, with the economic impact of the contracting binge a mere side effect of bureaucratic hoarding. We should all hope that the context of any such timing shenanigans were more budgetary than political in nature.
Inquiring minds may want to further investigate the above comments, with a look at actual BEA data from the top link.
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Note the highlights in yellow for Federal and defense spending, quarter by quarter. Now let's turn our attention to personal income.
Table 10. Personal Income and Its Disposition
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Personal Transfer Receipts
I highlighted line 12, "Personal current transfer receipts". Those are social security payments, disability payments, Medicare, unemployment insurance, etc.
In spite of a falling unemployment rate, transfer payments go up and up.
More people are retiring of course, but much of that is involuntary. Simply put, many people of retirement age want a job and need a job, retired involuntarily to have some money coming in. Moreover, Disability Fraud is rampant.
In 4th quarter of 2012, $2.4 trillion went into "transfer payments".
From Table 3 of the BEA report (not shown) we see that nominal GDP for 4th quarter was $15.829 trillion. Thus personal transfer payments accounted for 15.16% of GDP.
In the 4th quarter of 2012 we also see that federal government spending added an additional $2.46 trillion to GDP.
Thus federal government spending + personal transfers (more government spending) was $4.86 trillion, 30.7% of the stated GDP.
State and local adds another $1.46 trillion to GDP. All totaled, government spending accounts for 40% of GDP.
Don't Worry It's Transitory
For those looking for sugar-coated thoughts, I offer soothing comments from the Fed from today's FOMC Statement.
Information received since the Federal Open Market Committee met in December suggests that growth in economic activity paused in recent months, in large part because of weather-related disruptions and other transitory factors.
Yes, indeed. Let's blame hurricane Sandy for the rapid drop in military spending.
However, if it's not transitory (and I suggest it isn't), Bernanke will be tossing massive hints to Congress begging for more fiscal stimulus.
Here is a formula for measuring GDP.
GDP (Y) is a sum of Consumption (C), Investment (I), Government Spending (G) and Net Exports (X – M).
Y = C + I + G + (X − M)
G (government spending) is the sum of government expenditures on final goods and services. It includes salaries of public servants, purchase of weapons for the military, and any investment expenditure by a government. It does not include any transfer payments, such as social security or unemployment benefits.
Always remember: Government spending and government giveaways (regardless of how stupid or unproductive) add to nominal GDP, by definition.
Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
