Focus back on growth rather then austerity? 4Q GDP down

It might be the proverbial warning shot across the bow. The U.S. economy shrank by 0.1% in the last three months (fourth quarter – 4Q) of 2012 according to news from BEA this morning. The major problem: a 22.2% drop in defense spending. The second problem: a 5.7% decline in exports including a 0.1% decline in services exports. A draw down of inventories also contributed to the decline — although since sales we up, those inventories will need to be replenished in the coming months. The good news was that nonresidential fixed investment (i.e. business spending) grew by 8.4% compared to a 1.8% decline in the third quarter (3Q) of 2012. The 3Q decline was due to a 2.6% drop in investment in equipment and software. That turned around to a healthy 12.4% increase equipment and software investment in 4Q.
The government-cuts induced economic decline should give lawmakers pause about the upcoming funding cliff known as sequester. Stories out of Capital Hill have been that the sequester will happen — at least for a couple of months. We will see if today’s news changes that.
One other point. As I’ve mentioned before, the data has a basic problem in that it does not give us any guidance on investment in intangibles other than software. So we do not know whether companies have increased or decreased their investments in important areas such as human and organizational capital.
BEA has plans for a major revision in the GDP calculations next year. Two big changes will help make the GDP data more accurate: capitalization of research and development (R&D) and capitalization of entertainment, literary, and artistic originals (movies, music, books, art work, etc.). Currently, both R&D and the cost of creating entertainment, literary, and artistic originals are treated as a direct expense. Under the new system, they will be treated as investments, as they should be since they have long paybacks not just immediate returns.
As part of this shift, investments in these items will be specifically captured in the nonresidential fixed investment data. There will be separate data for software (now a subcategory of equipment), R&D, and entertainment, literary, and artistic originals. This should allow us to get a better picture of the I-Cubed Economy.
Final note: the BEA data on GDP is the “advanced estimates” subject to potentially large revisions. The next revision will be released on February 28.

One thought on “Focus back on growth rather then austerity? 4Q GDP down”

  1. December trade in intangibles – and annual

    Remember that big jump in the trade deficit for November that BEA reported last month? Well, things might have been a little better than normal in December. This morning, the BEA said the December trade deficit was $38.5 billion (compared…

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