Fourth-quarter economic decline is 'no reason to panic'
The Fed chalks up the first fall in the gross domestic product since early 2009 to hurricane and other factors.
01/31/2013 12:00 AM
05/16/2014 8:58 PM
A surprising reversal in the economic recovery — news that the nation’s output shrank ever so slightly late last year — sent experts scrambling for explanations Wednesday.
The gross domestic product fell 0.1 percent in the last three months of 2012, according to the Commerce Department. It was the first decline in the GDP since early 2009 amid the financial crisis and followed a surprisingly strong 3.1 percent growth spurt in the three months before that.
The fall came despite a soaring stock market and hopeful signs from other snapshots about the fourth-quarter economy.
“There’s no reason to panic,” said Ryan Sweet, senior economist at Moody’s Analytics Inc. “This does not increase the risk of a recession.”
The Federal Reserve, which met for its regular session in Washington, also seemed to brush aside the morning’s news.
Its afternoon policy announcement said, “Growth in economic activity paused in recent months, in large part because of weather-related disruptions and other transitory factors.”
The Fed nevertheless cited “downside risks to the economic outlook” in renewing its commitment to buy $85 billion worth of government and mortgage-backed securities each month until the job market improves substantially.
The Fed will continue its bond-buying against the advice and dissent of Esther George, president of the Federal Reserve Bank of Kansas City.
George has served on the Fed’s policy committee since October 2011 and has raised concerns about the Fed’s aggressive policies in public speeches. This was her first opportunity to vote on the monetary actions the Fed pursues.
She dissented because of concerns that the Fed’s actions are increasing the “risks of future economic and financial imbalances and, over time, could cause an increase in long-term inflation expectations,” the Fed said.
George’s vote continued a string of objections by various regional bank presidents that began with her predecessor, Tom Hoenig, who had dissented at each of the Fed’s meetings in 2010.
Investment strategist Jim Paulsen raised similar questions in his reaction to the GDP news, which he said underestimated the economy’s health.
“Why is the Fed still employing an unconventional, crisis-like monetary program in an economy which clearly is no longer in crisis?” Paulsen’s report from Wells Capital Management said.
Financial markets took the economic news and Fed announcement in stride.
The Dow Jones industrial average lost 44 points and closed at 13,910.42, which still left the blue-chip stock index 6.15 percent higher than it began the year.
Gold prices rose $13.25 an ounce, less than 1 percent, and interest rates on U.S. Treasury bonds dipped to just below 2 percent Wednesday, well above where they began the year.
Experts acknowledged that they simply had not seen the negative GDP report coming.
None of the 83 economists that Bloomberg News surveyed before the report had expected the number from the Commerce Department to be negative.
Many said they found reassurance in the report’s details.
• Much of the weakness came from an unexpected 15 percent drop in federal spending, and much of that was in military outlays.
• Hurricane Sandy had disrupted much of the economy in the Northeast late last year.
• Business investment and consumer spending improved during the quarter, giving economists the confidence to declare that the recovery remained intact.
Their bewilderment about the GDP report’s negative numbers stemmed partly from several recent and encouraging economic snapshots.
On Tuesday, the S/Case Shiller report for November showed the biggest year-over-year increase in housing prices in six years.
Orders for big-ticket items, from airplanes to refrigerators, rose each month in the fourth quarter. December’s report, released Monday, had exceeded even the most optimistic forecasts among 76 economists Bloomberg surveyed.
Last week’s reports included a broader measure of where the economy is headed, the Index of Leading Economic Indicators. Its gains last month were its largest since October.
And the job market has led fewer and fewer Americans to seek unemployment benefits for the first time. Last week’s report showed the fewest initial claims in five years.
Still, the jobs picture is not rosy. On Friday the Labor Department will release the January report, which economists predict will show the 7.8 percent jobless rate hasn’t improved.
But investors have offered more evidence of optimism by bidding up stocks feverishly. One report showed that the net inflow of money to mutual funds holding stocks was stronger this month than it had been since 2001.
Even before these signs, economists were saying Wednesday’s GDP report was going to show the economy had kept close to its modest 2 percent growth path.
On Wednesday, many were saying the fourth-quarter growth rate was likely to be revised upward next month when the Commerce Department will have more complete data. For example, Wednesday’s report relied on estimates about trade and business inventories for December — two areas that contributed to the unexpected drop.
Some economists said it made sense to look at the surprisingly weak fourth-quarter report together with the surprisingly strong third-quarter report. Combined, they suggest growth of 1.5 percent over six months.
Unfortunately, they expect the first few months of this year to be weaker than that.
For one, government spending cuts are set to begin in March. For another, consumers are less likely to keep spending at the same pace as last year.
A January survey by the Conference Board showed a big drop in consumer confidence. It fell to its worst level in more than a year and below even the lowest forecast among 73 economists surveyed.
Experts pointed to the end of the 2 percent payroll tax holiday, which is leaving that much less in workers’ take-home pay. The potential impact becomes serious for an economy that already was growing slowly.
“A 2 percentage point drag off of a small growth base is actually a pretty big deal,” economist David Rosenberg wrote in his morning comment at Gluskin Sheff + Associates Inc.Bloomberg News contributed to this report.
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