Today’s report provided further evidence that the economy stumbled into the finish line last year. The expectation was that the fine-tuning of the data would produce a better result. While the revision is technically an improvement, the bottom line is that growth was virtually nonexistent.
As anticipated, the narrowing trade deficit was a primary contributor to the upward revision to growth, as oil imports fell and exports increased by a wider margin than expected in December. Results in the housing sector were upgraded, confirming that the healing process there is continuing, even as estimates of consumer spending were revised fractionally lower.
The recent surge in consumer confidence may suggest that consumers are weathering the impact of higher payroll taxes and rising gas prices relatively well thus far in 2013. Nonetheless, household budgets have unquestionably been squeezed since the beginning of the year, and the full impact will only become apparent in the months ahead.
Individually, the impact of higher payroll taxes, the recent sharp increase in gasoline prices, and the looming federal spending cuts are incremental negatives for the economy. Viewed together, however, the combined drag is not insignificant, particularly in an environment already characterized by weak growth. The full impact of these issues will create a gradually increasing headwind to growth in the quarters ahead.
Continued progress in job creation and income growth in the quarters ahead will be key to sustained improvement in consumer confidence, which could help to mitigate consumer belt-tightening.
Meanwhile, monetary policymakers appear poised to keep their foot on the accelerator, as Fed Chairman Ben Bernanke’s recent comments reaffirmed.
Today’s report is a modest disappointment, but it also doesn’t materially change the outlook from here. Economists broadly expect a sharp slowdown in trend growth in the next few quarters as higher taxes and government spending cuts are absorbed. Few are calling for an outright recession, however, and markets would react negatively should growth stall more than anticipated.
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