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3 Reasons Negative GDP Is Not as Bad as You Think

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The notion of American economic growth took a hit today when the first estimate of Gross Domestic Product (GDP) for the fourth quarter of 2012 showed a decline of 0.1%. Expectations had been for 1% growth. This the first GDP contraction since Q2 2009.

Despite the horrible headline, Breakout guest Jim Paulsen, chief investment strategist at Wells Capital Management, ticked off some good news under the headline.

"It's a shocker headline and the bears will have some fun with that, but when you really look at it, I think it's a lot better than that," Paulsen says in the attached clip. His thinking is as follows:

Government Spending was largely to blame

Government spending as a whole declined 6.6% in Q4 after rising 3.9% in the prior quarter. Defense spending fell 22%, the biggest drop since 1972. By contrast, defense spending was up 12.9% in Q3.

Cynics find the notion of a sharp reversal in government spending immediately after a Presidential election suspicious, but the drop had a very real impact on GDP. Regardless, Paulsen thinks the defense spend was a "one-off that won't be repeated."

Consumer Spending Rose While Inventories Fell

Real personal consumption actually accelerated in the quarter, rising 2.2% versus 1.6% in Q3. Durable goods, often a sign of long-term consumer confidence, rose 13.9%.

Inventories fell in the quarter, taking 1.27% off the GDP number after adding .73 in Q3. That either suggests pent up production demand to restock or a lack of business confidence. With the uptick in personal consumption, Paulsen is betting it's the former.

"I think even the bears would agree when you look at the private sector performance, the business and consumer spending, that's pretty solid across the components," he says.

Considering the GDP number in the context of all other data, Paulsen says there's nothing to suggest a sustainable economic decline.

Impact on Fed Thinking

It may not be a sustainable decline, but it happens just hours before the FOMC policy statement. Traders are apparently okay shaking off an oft-revised data point, but a change in Fed policy is a much different matter.

Paulsen rejects the notion that the Fed is going to change it's thinking based on this morning's number. "I think the Fed knows this is a one-off distorted number as well," he states. "They're going to be much more tied to what happens here later in the week with the jobs number."

The Labor Department's January unemployment report is due out Friday at 8:30am/ET.

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