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Government spending falls off a cliff in the fourth quarter, taking GDP slightly negative

posted on January 30, 2013 at 9:40 pm
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manufacturing

Well, now we know how much the fiscal cliff crisis hurt the economy in the fourth quarter.

Figures released today, January 30, by the Bureau of Economic Analysis showed that the U.S. economy contracted in the fourth quarter of 2012 with U.S. GDP falling 0.1%. Economists surveyed by Briefing.com had forecast a 1% increase in GDP for the quarter. This is the first drop in U.S. GDP since the second quarter of 2009.

The big killer was a 6.6% drop in government spending. The worst part of that decline came at the national level where spending by the federal government dropped by 15%. The decline in government spending at all levels took about 1.3 percentage points out of GDP.

It wasn’t all roses on the private side of the economy—inventories cut 1.3 percentage points out of the GDP growth rate—but the private economy showed solid strength with consumption up 2.2% in the quarter (an increase from the 1.6% growth in consumption in the third quarter) and fixed investment accelerating sharply to grow by 9.7% (compared to just 0.9% in the third quarter.)

You could conclude that without the drag of lower government spending fourth quarter GDP growth would have come in just fine. That’s certainly a conclusion supported by the ADP employment survey for January released today. The consensus forecast was that the survey would show an addition of 175,000 jobs in January, a slight drop from the 185,000 jobs added in December. The actual survey came in at 192,000 net jobs, above both the consensus expectation and last month’s report.

If Friday’s official jobs number from the U.S. Bureau of Labor Statistics points in the same direction as the ADP survey, then I think the markets are likely to shrug off any lingering disappointment with today’s GDP number. The consensus for Friday is that the economy will have added 180,000 jobs in January. That would be a significant improvement from the 155,000 jobs added in December.

If the data show 180,000 jobs or better, I think the financial markets will go back to believing that U.S. economic growth is intact if not especially robust.

(Sorry to be posting my first post of the day so late but this was a travel day for me. I’m now at the MoneyShow in Orlando so tomorrow should see something like a normal schedule.)

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One comment

  • Altec on 31 January 2013

    Jim,

    Not so much as one penny was “cut” from federal spending, please show me these cuts from the fiscal cliff. Federal spending has actually increased.

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