The US GDP Number – Predictive or Not?

The US GDP rate was announced as -0.1% for the fourth quarter of 2012. (1)(2)(3)(4)(5) This number is preliminary, but it is well below forecasts so it is getting some attention. What components are responsible for this result? The reasons for the decline are cited as a decline in defense spending and government spending. On the positive side, inventories are going down and business spending was stronger in the fourth quarter.

What to take from these numbers? Not much. The numbers indicate how easy it is to distort the GDP and the trends. The reasons for the defense spending decline were cited as wars ending and budget constraints. (6) It turns out that defense spending can be cyclical due to budget deadlines. (6) Also, wars can start and stop very quickly. This means that any change in military spending can cause large distortions in GDP, and this can happen frequently. Other sources blamed weather related disruptions for the GDP drop, interpreted as Hurricane Sandy. (3) If a hurricane was the issue, then you would see a decline by regional area, notably where the hurricane struck. When the regional numbers are released, it will be something to keep in mind. A natural disaster typically causes a decline in GDP output, followed by an increase in the GDP result where money is used to rebuild after the damage. The timing of this however, will be different for each disaster.

On the positive side, there was an increase in business spending and a drawdown in inventories. Keep in mind that the consumer is supposed to be 70% of the economy or the GDP number, and yet the consumer effect was dwarfed by all of these other factors – defense spending, government expenditure, natural disasters and business decisions. What should also be kept in mind is that the fiscal cliff drama is focusing on similar areas where the GDP declined – defense spending and government spending. This would mean that the GDP numbers will get even more volatile and should be treated with less influence compared to the decisions of influential players.









About joetheinvestor
Joe Barbieri has Bachelors degrees in both Civil Engineering and Commerce from the University of Toronto. He has worked in the Financial Services field for over 12 years, covering positions from Retail Customer Service and Fund Accounting, through to Investment Research on the Institutional side. He has worked in 5 companies, spanning banks, a mutual fund, a Consulting Firm and a Large Canadian Pension Plan. He currently has a Chartered Financial Analyst designation (CFA) from the CFA Institute. He has recently published articles in Pension and Benefits Monitor Magazine as well as the Internet.

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