The U.S. Economy Shrinks. Is Recession on the Way?

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The U.S. economy essentially screeched to a halt in the last quarter of 2012 – contracting by -0.1% relative to expectations of +1% growth. As shocking as the first negative GDP growth print since 2009 is, it doesn’t mean we are heading towards a recession, in my humble view. It does show, however, the level of vulnerability for the economy.

The sharp deceleration from the third quarter’s 3.1% growth pace is mostly due to factors that are either temporary (effects of hurricane Sandy) or not reflective of underlying momentum in the economy. Lack of private sector inventory accumulation, trade deficit, and weak spending by government dragged down GDP growth. The parts of the economy that really matter – spending by households and businesses – showed acceleration from the third quarter’s pace.

Non-residential fixed investment (or business spending) increased at 8.4% rate, compared to the 1.8% decline in the third quarter. The two sub-categories within this account are non-residential structures and equipment & software. Structures decreased at a -1.1% compared to the ‘unchanged’ reading in Q3 and equipment and software growing at 12.4% compared to the 2.6% decline in the third quarter. Consumer spending, the biggest part of the economy at close to 70% of the total, increased at a 2.2% pace compared to the 1.6% growth rate in the third quarter. All the sub-categories within the consumer spending account, durable goods (+13.9% vs. +8.9% in Q3), non-durable goods (+0.4% vs. +1.2%), and services (+0.9% vs. +0.6%) showed gains.

The spending performance is particularly noteworthy given the headwinds in the fourth quarter of 2012, from a bitterly fought presidential election to ‘Fiscal Cliff’ and anemic jobs market. The key issue going forward on the consumer spending front will be the extent of negative impact that the reversal of the payroll tax cut will have on household budgets and spending. The sharp drop in consumer confidence in the Conference Board and Michigan surveys doesn’t bode well on this front, but the predictive value of these confidence surveys is less than fool proof.

Today’s negative GDP reading is most likely a one-off event and not sign of an impending recession or protracted slowdown. There is enough momentum in the economy, on the consumer and business side, to keep aloft.

Do you agree?

Zacks Investment Research



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