Q4 GDP Research Notes

by Jim Baird on March 28, 2013

CaptureConsumer spending trumps defense cuts as Q4 GDP rose 0.4%

Today’s third estimate of fourth quarter’s GDP came in at 0.4%, which was slightly higher than the second estimate of 0.1%.

While attention has largely turned to more timely economic data, today’s revision to GDP for the final quarter of last year provides another affirmation that the economy stumbled into the finish line at the end of 2012.  Although the revision represents a modest improvement over the two previous estimates released by the Department of Commerce, it still tells a similar story and shouldn’t incite any optimism.

The pace of consumer spending was revised fractionally lower, but was still respectable at 1.8%.  The report also painted a positive picture for residential investment, reinforcing the view that the recovery in the battered housing market remains well on track.

Conversely, cuts in federal government spending weighed heavily on growth.  Those cuts were overwhelmingly focused in defense, while nondefense spending grew at a 1.7% annualized rate.

Despite today’s GDP revision, the most recent print will have little effect on the outlook moving forward.  The consensus view is that the economy has regained a bit of momentum in the past few months, as consumers have seemingly weathered the storm of higher taxes, rising energy prices, and limited income growth surprisingly well thus far. 

Consumer spending appears to be advancing, although the recent sharp decline in consumer confidence is a cause for concern, and suggests that consumers are beginning to grow weary of the strain on household budgets caused by higher taxes, rising gas prices, and the anticipated effects of federal spending cuts.  Further improvements in the jobs market may help to mitigate the drag from diminished take home pay, but consumers have already dipped heavily into savings to maintain their spending habits.  As a result, their ability to continue to tap that resource is increasingly limited.

Modest growth remains the consensus view, with some still suggesting that the economy could be poised for better growth in the latter half of the year.  Against the backdrop of a continuing slowdown in the global economy, however, the ability for the U.S. economy to advance at a satisfying pace will be challenged.

To see news coverage featuring Jim’s comments, please visit the following sites:

S&P 500 Hangs In Above Record Levels (Dow Jones)

S&P High Is a Show of Faith in Fed – Record Shows That for Many Investors, Central Bank’s Continuing Support Trumps Tepid Recovery (Wall Street Journal)

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