GDP Growth – Inching Up, But Trouble Ahead

The Bureau of Economic Analysis (BEA) third estimate of real GDP growth for the fourth quarter of 2012 revises growth up to +0.4% from the initial estimate of -0.1% in the advance estimate and +0.1% in the second estimate. Non-residential fixed investment and exports were revised upward, personal consumption expenditures were revised downward. Real GDP grew at a 3.1% annual rate in the third quarter.

GDP growth is slightly higher than previously estimated and significantly lower than last quarter, but the biggest development with respect to economic growth is the apparent acceptance of the “sequester.” We’ve estimated that these across the board spending cuts will lower GDP growth in 2013 to 2.0% from 2.5% (Q4/Q4). Our expectation was that these cuts would be avoided but it appears that was overly optimistic.

Our next forecast update will reflect the impact of the sequester. Instead of growth rebounding in the first quarter of 2013 and accelerating through the year, the first quarter bounce will be weakened in the second quarter and significantly reduced in the second half of the year as direct cuts in federal spending, grants to state and local governments, and government transfer payments (e.g., unemployment benefits, food stamps, etc.) trickle down to reduce growth indirectly through lower consumption and investment. The annualized growth rate in the second quarter will be reduced by roughly 0.5 percentage points (from 2.4% to 1.9%) while growth rates in the second half of the year will be reduced from roughly 3.0% to closer to 1.0%

This was an outcome worth avoiding.

 



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