The U.S. economy shrank—better news than you think

To recap:

• The U.S. economy shrank at an annualized rate of 0.1 per cent in the last three months of 2012, according to the advance estimate of the Bureau of Economic Analysis published today.
• That was well below the consensus expectation of 1.1 per cent annualized growth. It was also in stark contrast with the 3.1 per cent growth recorded in the previous three months.
• Weighing down the economy were an outsized drop in government spending, a slowdown in inventory building, and a decline in net trade (exports minus imports).
• Federal spending decreased 15 per cent in the fourth quarter, a sharp u-turn from the 9.5 per cent increase of the third quarter. Spending on national defense, in particular, plunged 22 per cent from a 12.9 per cent increase in the prior three months. It was the largest single-quarter drop in defense spending since 1972.
• On the other hand, consumer spending, as well as business and residential investment all grew.
• For the year as a whole, GDP grew 2.2 per cent in 2012, a few tacks above the 1.8 per cent recorded in 2011.

What the analysts are saying:

• Watch the federal expenditures pattern closely: the figures suggest the Department of Defense ramped-up spending in the third quarter for fear of the fiscal cliff, leaving very little for the last three months of the year, writes TD’s James Marple. With more austerity to come, the fourth quarter GDP release could be a preview of what 2013 is going to look like, with the governmental hand withdrawing and private spending finally taking the lead in propelling growth.
• Though higher payroll taxes might put a lid on consumer spending for a bit, writes RBC’s Nathan Janzen, the current sales pace should force U.S. producers to start rebuilding their inventories soon. Similarly, the plunge in government spending should be a one-time only affair. There’s good reason to believe the fourth-quarter dip will be short-lived.