Fourth-Quarter GDP Revised Upward

Post-cliff, will businesses start spending again?

The Commerce Department reports the economy grew 0.4 percent in the fourth quarter of 2012, up slightly from previous estimates.

The Commerce Department reports the economy grew 0.4 percent in the fourth quarter of 2012, up slightly from previous estimates.

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The nation's economic output grew at an annualized 0.4 percent in the fourth quarter of 2012, the government reported Thursday, in its third estimate of the period's growth.

A growth rate of 0.4 percent is barely faster than standing still, and represents a slowdown from the third quarter's 3.1 percent. The slowdown was largely caused by reductions in business inventories, as well as a downturn in every level of government spending. However, consumer expenditures accelerated, and spending on homes and renovation, as well as business investment in buildings and equipment also helped to boost GDP, indicating that American firms and the people who work in them are still willing to spend.

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While 0.4 percent GDP growth is tepid, it is a marked improvement from earlier estimates of fourth quarter growth. The Commerce Department revises its estimates as it receives new information. In its first estimate, the department said the economy had shrunk by 0.1 percent in the fourth quarter, and last month it revised that estimate slightly upward, to 0.1 percent.

In addition, the factors that pulled fourth quarter GDP downward appear to be largely temporary, says Joel Naroff, president and chief economist at Naroff Economic Advisers. That means that there is much more to the headline figure than meets the eye.

"The key sectors of the economy were all pretty decent. If that's the case, what we have to do is really downplay the headline number, which was due to some temporary factors," he says.

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For example, businesses pulled back on their spending on inventories out of fear for the coming fiscal cliff. In addition, there was a sharp pullback in defense spending, a decline that is not likely to happen again this quarter..

GDP growth will likely bounce back to around 2 to 2.5 percent this quarter, Naroff estimates, but he says projecting any further forward is virtually impossible, given the uncertainty coming from Washington. Without sequestration, he says he would have put 2013 GDP growth at around 3 percent—an improvement over the last few years. However, whether Congress decides to keep sequestration cuts in place or repeal them will play a large part in determining the nation's economic health for the remainder of 2013.

"If we get sequestration [for the full year], I'm going to have to take a full percentage point out of growth," he says. "What happens next quarter is a really good question. Right now I have no idea."

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