Growth Stall Obscures U.S. Consumer, Business Gains: EconomyShobhana Chandra and Michelle Jamrisko
The economy in the U.S. unexpectedly came to a standstill in the fourth quarter as the biggest plunge in defense spending in 40 years swamped gains for consumers and businesses.
Gross domestic product dropped at a 0.1 percent annual rate, weaker than any economist forecast in a Bloomberg survey and the worst performance since the second quarter of 2009, when the world’s largest economy was still in the recession, Commerce Department figures showed today in Washington. A decline in government outlays and a smaller gain in stockpiles subtracted a combined 2.6 percentage points from growth.
Rising auto sales led the advance in consumer spending last quarter as a drop in fuel prices and the largest income gain in four years enabled the biggest part of the economy to overcome superstorm Sandy and Washington budget battles. Little inflation and a stop-and-go expansion are why Federal Reserve policy makers, who wrapped up a two-day meeting today, pressed on with plans to pump more money into financial markets.
“I’m not going to say growth is particularly strong, but this is not a recessionary signal by any means,” said Paul Edelstein, director of financial economics at IHS Global Insight in Lexington, Massachusetts, whose team projected a 0.3 percent gain, the lowest in the Bloomberg survey. “This really was a story about a payback in national defense spending. Consumer-spending growth picked up, fixed investment was fairly strong.”
Stocks fell, dragging benchmark indexes from five-year highs. The Standard & Poor’s 500 Index declined 0.4 percent to 1,501.96 at the close in New York.
The European economy, meantime, showed more signs of emerging from recession. A measure of executive and consumer sentiment in the euro area climbed in January to the highest level in seven months, figures from the European Commission in Brussels showed today.
The U.S. slowdown followed a 3.1 percent increase at an annual rate in GDP, the volume of all goods and services produced, in the third quarter when inventories jumped, government spending advanced and trade improved, providing almost mirror images of last quarter’s results.
The “statistical noise in the defense and inventory components” means it’s best to look at the average pace of growth over the second half of the year to get a better understanding, economists David Greenlaw and Ted Wieseman at Morgan Stanley in New York, said in a note. The resulting 1.5 percent “is right in line with the growth pace seen in recent years.”
The median forecast of 83 economists surveyed by Bloomberg called for a 1.1 percent gain in growth. Projections ranged from 0.3 percent to 2.1 percent. Today’s estimate is the first of three for the quarter, with the other releases scheduled for February and March when more information becomes available.
For all of 2012, the world’s largest economy expanded 2.2 percent after a 1.8 percent increase a year earlier.
Consumer spending, which accounts for about 70 percent of the economy, expanded at a 2.2 percent annual rate last quarter, up from 1.6 percent in the previous three months, today’s report showed. Purchases of durable goods, including automobiles, climbed at a 13.9 percent rate, the most in two years.
Cars and light trucks sold at a 15.3 million annual rate in December after a 15.5 million pace the prior month, the best back-to-back showing since early 2008, data from Ward’s Automotive Group showed earlier this month.
A jump in pay may have helped consumers. After-tax income rose at a 6.8 percent annual rate from October through December, the biggest increase since the second quarter of 2008, today’s report showed.
In addition to improving wages and salaries, some companies also paid dividends and employee bonuses earlier than usual before tax rates went up this year. The Commerce Department estimated that about $26.4 billion of the increase in incomes was attributable to early dividend payments and another $15 billion reflected bonuses and other types of irregular pay.
The gain in consumer spending may be difficult to sustain this quarter as a tax increase takes a bigger chunk from earnings. Congress on Jan. 1 let the payroll tax revert to 6.2 percent from 4.2 percent while avoiding broad-based income tax increases. Lawmakers are now wrangling over spending reductions scheduled for March 1 that threaten to further slow the economy.
Another report today showed companies took on more workers than projected in January, showing the labor market kept making progress at the start of the year. The 192,000 increase in employment, the most since February 2012, followed a revised 185,000 gain in December, according to figures from the Roseland, New Jersey-based ADP Research Institute.
A statement from Fed policy makers today indicated the central bank will continue its unprecedented balance-sheet growth to spur the economic expansion and reduce unemployment. The Federal Open Market Committee said it will keep purchasing securities at the rate of $85 billion a month.
The Fed repeated that the purchases will continue “if the outlook for the labor market does not improve substantially.”
“Although strains in global financial markets have eased somewhat, the committee continues to see downside risks to the economic outlook,” the FOMC also said.
The GDP report also showed price pressures remain contained, giving policy makers reason to stay the course. A measure of inflation, which is tied to consumer spending and tracked by Fed officials, climbed at a 1.2 percent annual pace compared with 1.6 percent in the prior quarter.
Corporate spending on equipment and software climbed at a 12.4 percent pace, contributing 0.86 percentage point to growth last quarter. It had declined at a 2.6 percent rate in the previous three months, the most in more than three years.
Residential construction increased at a 15.3 percent rate. For all of 2012, homebuilding climbed 11.9 percent, the best performance since 1992.
Gains in housing, a rebound in business investment and a pickup in global growth that are benefiting companies such as General Electric Co. will probably help underpin GDP this year.
General Electric’s fourth-quarter profit topped analysts’ estimates as demand in emerging markets fueled the aviation and health-care divisions, which helped build a record $210 billion order backlog for the Fairfield, Connecticut-based company.
“We saw real strength in the emerging markets and the developed regions stabilized,” Chief Executive Officer Jeffrey Immelt said on a Jan. 18 conference call. GE “entered 2013 with substantial momentum” following “solid order growth in five of the six businesses,” he said.
Government outlays dropped at a 6.6 percent annual pace from October through December, subtracting 1.3 percentage points from growth, according to today’s GDP report. The decrease was led by a 22.2 percent fall in military spending that was the biggest since 1972, during the Vietnam War era.
Inventories grew at a $20 billion annual rate, down from a $60.3 billion pace in the third quarter. The pickup in consumer and business spending, combined with the effects of superstorm Sandy, which struck the East Coast in late October and caused widespread damage including shuttering businesses and destroying automobiles, may have restrained stock-building. The smaller gain in stockpiles cut GDP by another 1.3 percentage points.