Asymmetrical Information - Megan McArdle

01.30.13

GDP Falls in the Fourth Quarter

The private sector is doing okay. But it's still not good.

Here's the good news: the advanced release says that GDP only fell 0.1% in the fourth quarter. Which is practically like not falling at all.

Here's the bad news: it fell, when no one was expecting it to.  

The big categories dragging down growth: falling federal government spending, exports, and inventories.  None of that is good news.  The 4th quarter decline in government spending was driven by plunging defense spending, and with the sequester coming, we may see a repeat later this year.  Exports were presumably depressed by lackluster growth around the world, which we can expect to continue, given events in Europe.  And it's never good to see downward inventory trends when the economy is contracting; it tends to be a sign that companies are adjusting to unexpectedly falling demand for their goods.  

The good news, such as it is, is that personal consumption spending and investment were humming along, growing 2.2% and 8.4%, respectively.  The boost in personal spending was driven mostly by durable goods, which probably means that people are reaching the limits of hoarding--they've pushed the old car along an extra five years, put up with the oven that doesn't always work, and gone without a dishwasher, but they're now having to replace some stuff.  

In theory, that can touch off recovery, as production eventually ramps back up, and rising confidence ripples through the economy.  (Paul Krugman had a great explanation of this a while back, but I can't find it.  Curse your prolific output, Professor Krugman!)  But in the context of an otherwise lackluster GDP report, this is worrying in the short term: people aren't buying because they have more confidence in their future, but because they feel they have absolutely no choice.  We don't want to be in a place where people reluctantly pry open the piggy bank only because the old clunker is finally lying smoking in the driveway; we want an economy where people feel that it is safe to buy a new car, because they are likely to have a job in three years.

So while the private sector is healthier than the government sector, it's not healthy--certainly not healthy enough to make up for falling government spending.   The private sectors numbers are in the "okay" range, not "spectacular".  And right now, after five years of below-trend growth, we need spectacular.  We need growth that will drag the long-term unemployed back into the workforce, boost retirement accounts, and give us back a little of that secure prosperity that we'd come to expect from America.  

So far, we haven't gotten it.  Instead, as Tyler Cowen likes to say, "We are not as rich as we thought we were."  And if the advanced GDP report is right, we're not getting any richer.