The Corner

U.S. Economy Shrinks in Fourth Quarter

According to the Bureau of Economic Analysis’s latest report, the U.S.’s gross domestic product contracted at an annualized rate of 0.1 percent in the fourth quarter of 2012. This is quite a large deceleration from the third quarter, in which it rose at a rate of 3.1 percent. This is the first time the U.S. economy has shrunk since the second quarter of 2009; we join the U.K. in having a downward tick in the fourth quarter.

This is a pretty significant miss from expectations: Various surveys of economists had predicted about 1 percent growth.

The BEA attributes the slowdown to “downturns in private inventory investment, in federal government spending, in exports, and in state and local government spending”; personal consumption expenditures and nonresidential fixed investment were bright spots. According to the BEA, inventory shrinkage cut 1.27 percent from the real growth rate.

The main issue, it seems, is a dramatic difference in federal expenditures: In the third quarter, when the economy grew at a rate of 3.1 percent, federal expenditures grew at an annual rate of 9.5 percent (see Veronique de Rugy’s analysis of this issue from late October, although it should be noted that 3Q GDP turned out to be even stronger than was thought at the time). In the fourth quarter, federal expenditures decreased at an annual rate of 15 percent, with defense spending decreasing at a rate of 22.2 percent (nondefense expenditures actually rose slightly).

As always, the initial estimates of GDP numbers can be quite inaccurate, and are subject to pretty large revisions.

One interesting note: Personal income rose at an annual rate of 7.9 percent in the last quarter ($256 billion), compared to 2.2 percent in the third. Why? The fiscal cliff, pretty much:

The acceleration in personal income primarily reflected a sharp acceleration in personal dividend income, an upturn in personal interest income, and an acceleration in wage and salary disbursements. The sharp acceleration in personal dividend income reflected accelerated and special dividends that were paid by many companiesin the fourth quarter in anticipation of changes in individual income tax rates. The upturn in personal interest income primarily reflected an upturn in interest rates for Treasury Inflation Protected Securities. The acceleration in wages and salaries reflected the pattern of monthly Bureau of Labor Statistics employment, hours, and earnings data for the fourth quarter, as well as a judgmental estimate of accelerated compensation in the form of bonus payments and other irregular pay in the fourth quarter.

This income surge also, presumably, explains why the personal savings rate rose in the fourth quarter from 3.6 percent to 4.7 percent.

Patrick Brennan was a senior communications official at the Department of Health and Human Services during the Trump administration and is former opinion editor of National Review Online.


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