The Commerce Department reported today that GDP declined in the fourth quarter, at an annualized rate of 0.1 percent. That is the first time that economic output has fallen since the second quarter of 2009, the end of the Great Recession. It is also a significant decline from the third quarter's 3.1 percent annual growth.
The decline was primarily led by a decline in national defense spending, as well as a decline in private companies' inventories, both of which fell at a rate of well over 1 percent.
Still, a few areas saw positive growth, such as consumer spending and nonresidential fixed investment, a category that includes business investment in buildings, machinery, and software. Spending on new homes and renovations also boosted the figures, indicating that the housing turnaround is continuing.
The news of a reversal in GDP growth may create fears of a double-dip recession, but one quarterly decline in GDP does not a recession make; it takes two straight quarters of decline to technically constitute a recession. And the report does not really show that the economy is suddenly in poor health, says one expert. Rather, it appears that two large factors—spooked businesses plus a tight-fisted Defense Department—simply coincided to create this decline.
"The first decline in GDP growth in 3 1/2 years is never a good sign but forget the number: It says nothing about the state of the economy," says Joel Naroff, president and chief economist of Macroeconomic Advisors, in a commentary this morning.
"The combination of declining defense spending and rapidly falling inventories reduced growth by 2.6 percentage points and those two negatives are not likely to be repeated, especially at the pace seen last quarter."
Naroff points out that consumer spending was not weak in the fourth quarter, and that businesses continued to spend on fixed investment, both signs that growth remains stable.
Another expert agrees: "Under the hood, we see solid growth in both consumption and investment and as a result, private spending was humming along," says Justin Wolfers, a nonresident fellow at the Brookings Institution, in an E-mail. "Last quarter's decline in U.S. GDP was all about inventories (which subtracted 1.3 percentage points from growth), as well as sharp cuts in defense spending. Neither of these are expected to persist."
While the economy may still have some solid fundamentals, economic growth is likely to remain soft throughout the first half of 2013, said Mark Zandi, chief economist at Moody's Analytics, in a call with reporters this morning.
Further government cutbacks are likely, whether from the sequester cuts scheduled for March 1 or whatever deal Congress manages to strike to avoid those cuts. In addition, American workers are still digesting the end of the 2 percent payroll tax cut, which expired at the start of this year, Zandi says.
"It's hard to see the economy really kicking into a higher gear until we're further down the line and have more of a chance to digest the tax increases and the spending cuts that are coming," Zandi said.
In addition, this is the Commerce Department's first estimate of fourth-quarter growth. There are still two more revisions to come, meaning that the figure could be revised upward.